Karnataka GST Crackdown: Why Shopkeepers Are Ditching UPI Payments

The Shockwave in Bengaluru’s Markets

In early July, a Bengaluru resident posted on X, “Early morning shocker! Laundry guy called me to say he no longer accepts UPI... only cash.” This wasn’t a one-off. Across the city, QR codes started disappearing from shopfronts. From grocery stalls to salons, traders began quietly rolling back their UPI systems. The reason? A wave of GST demand notices targeting shopkeepers receiving over ₹40 lakh annually via UPI.

Karnataka’s Commercial Tax Department has started sending notices to thousands of small traders who accepted UPI payments but hadn’t registered for GST. This crackdown, although lawful, has sent ripples across India’s digital-first merchant economy.

What Triggered the GST Notices?

According to Vipul Bansal, Commissioner of Commercial Taxes, the department accessed data from UPI service providers and identified 14,000+ cases where businesses crossed the ₹40 lakh turnover threshold from digital receipts but didn’t register for GST.

Here's what they’re checking:

• UPI receipts between FY 2021–22 and FY 2024–25
  
  

• Whether businesses are GST-registered
  
  

• Nature of goods sold — exempt vs taxable
  
  

• Eligibility for composition scheme
  
  

Important: As per law, any business with annual turnover over ₹40 lakh (₹20 lakh in some states) must register for GST unless exempt.

Why Are Shopkeepers Worried?

For many small traders, this move feels like a bolt from the blue. UPI was convenient, secure, and fast — and many believed that small-value transactions, even if large in total, were under the radar.

Real-Life Reactions:

• Dip in UPI Usage: Several shopkeepers in Bengaluru reportedly removed QR codes after getting GST notices.
  
  

• Fear of Penalty: Many are unsure if they owe years of back taxes, interest, and penalties.
  
  

• Peer Mobilization: Some, like Sudhakar Shetty in North Bengaluru, are rallying fellow traders to approach the government.
  
  

“Customers want UPI. We will see how this can be worked out,” Shetty told Moneycontrol.

Is UPI Now a Liability for Small Businesses?

Not necessarily — but the lack of awareness about tax thresholds has made it feel that way.

Then why the backlash?

• Cash = Anonymity: Cash doesn’t leave a digital trail. UPI does.
  
  

• GST Complexity: Many traders find compliance with filings, reverse charge, and return schedules confusing.
  
  

• Sudden Action: Notices without prior education or reminders have caused panic.
  
  

But UPI itself isn’t to blame. As Bansal rightly pointed out:

“The UPI revolution was driven by consumers, not traders. If one trader refuses UPI, another will accept it — because the demand comes from the customer.”

The Government’s Stand: What the Law Says

Bansal clarified that the department is issuing notices, not final demands — and traders have the opportunity to explain their case.

Categories of Traders Likely to Be Exempt:

So, if you’re under the limit or selling exempt goods, you're likely safe — but you need to prove it.

What Shopkeepers Can Do Next

Instead of abandoning UPI, shopkeepers can take these steps to stay compliant:

Actionable Steps:

• Evaluate Your Turnover: Include UPI, cash, card — total business receipts.
  
  

• Register for GST if Eligible: Crossed ₹40L? Don’t wait for a notice.
  
  

• Consider Composition Scheme: If your turnover is up to ₹1.5 crore, this simplified scheme lets you pay 1% GST.
  
  

• Maintain Clean Books: Digital receipts, invoices, GST filings — all should align.
  
  

• Consult a Tax Professional: Don’t guess. Clarify your liability before replying to notices.
  
  

Impact on Digital India’s Momentum

Karnataka alone accounts for 7.73% of all UPI transactions in India (as of May 2025), second only to Maharashtra. A disruption here sends worrying signals.

Potential Ripple Effects:

• Trust Erosion: If traders fear UPI, they’ll push customers to cash.
  
  

• Consumer Inconvenience: Urban consumers accustomed to cashless payments face hurdles.
  
  

• Black Economy Resurgence: Cash transactions are harder to trace — a potential policy setback.
  
  

“In a state contributing nearly 8% of India’s UPI volume, sudden regulatory action — without merchant education — could have unintended ripple effects.”

What This Means for Consumers

Many consumers are already facing the change:

• Some reported using ATMs for the first time in years.
  
  

• UPI cashback apps, split bills, and scan-to-pay habits are being tested.
  
  

• Dual pricing models may return — discounts for cash, surcharges for digital.
  
  

What you can do:

• Carry a small amount of cash for local purchases.
  
  

• If your local shop stopped UPI, ask them why — and guide them toward the composition scheme.
  
  

• Support businesses that stay digitally compliant.
  
  

Final Takeaways

Karnataka’s GST notices are a wake-up call — not just for small traders, but for India’s digital economy as a whole. While the government is right to enforce tax rules, it must also invest in awareness, education, and support.

Key Takeaways:

• GST registration is mandatory above ₹40 lakh turnover — UPI receipts count.
  
  

• UPI isn’t the problem — lack of awareness and compliance is.
  
  

• Traders should consider the composition scheme and maintain transparent records.
  
  

Consumers can support digital-friendly businesses and spread awareness.

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