Recently, the writer was involved in arranging a close family wedding. Large sums had to be paid to a long list of vendors providing services including lights, decorations, flowers, video, photo, catering, wedding gifts, and so on. What was surprising was that all these vendors preferred receiving money through UPI. With growing digitisation of payments, no one likes handling large amounts of cash any more. But it was also obvious that these vendors were under the misconception that receiving money through UPI was akin to receiving cash payments — no trail, no questions asked.
The small traders in Karnataka who are up in arms against tax authorities appear to have been harbouring similar erroneous ideas. The Karnataka Department of Commercial Taxes had mined UPI data for the period between 2022 and 2025 to identify small businesses receiving UPI payments above the GST exemption threshold. A flurry of notices were sent to thousands of small vendors, including flower, vegetable and fruit vendors, renewing protests about ‘tax terrorism’ and harassment of poor vendors.
The possibility of tax officials using UPI data to identify tax evaders has been present for some time. Given that over ₹80,000 crore of UPI transactions are put through every day, tax officials now have access to a treasure trove of data. But it is also true that the usage of UPI has recorded stellar growth because many seem to think that it leaves no trail. Once they become aware of this, usage of UPI can drop. To use or not to use the UPI data, that’s the quandary before the government.
Growing UPI share
Adoption of UPI by the masses is one of the great success stories of recent times. The value of UPI transactions made by retail customers was ₹1.09 lakh crore in FY18, accounting for just 0.38 per cent of total retail payments. This has improved dramatically in the last seven years, with ₹260 lakh crore of transactions, accounting for 28 per cent of retail payments being put through in FY25.
Interestingly, the share of NEFT has reduced from 61 per cent of retail payments in FY18 to 48 per cent now, implying that instead of making large money transfers through bank accounts, clients are now using UPI for peer-to-peer transaction (P2P).
If we look at the break-up of UPI transactions, 70 per cent are P2P and 30 per cent, P2M (payments to merchants in the point of sale). With many vendors now wanting large payments transferred through UPI, it is possible that business transactions are also being included in the P2P segment.
Of the total UPI payments of ₹260 lakh crore in FY25, even if 5 per cent is for taxable goods and services not reported to tax authorities, the revenue possibility is immense. Tax collection can increase by at least ₹1.5 lakh crore at 12 per cent tax rate is considered.
Plight of small vendors
The GST system grants exemption to small businesses with turnover up to ₹40 lakh a year for goods and ₹20 lakh a year for services from registering or filing returns. Further, many goods and services such as unfrozen and unprocessed fruits, vegetables, fish, meat, spices, milk, etc., are on the exempt list of GST. Most street vendors would therefore not be liable to pay GST.
But they will become liable to pay GST if they sell other taxable goods alongside fruits and vegetables such as ready-to-eat packaged food, beverages, etc. Small businesses can also opt to pay GST under the composition scheme if their annual turnover is less than ₹1.5 crore. Here the compliance burden is very less, and tax can be paid at a much lower rate, but without availing input tax credit. With most customers wanting to pay through digital means, vendors have also installed QR codes for accepting the payments. The commercial tax department of Karnataka is not wrong in analysing the data from UPI payments for flagging unregistered vendors who are evading tax. But the department should have spent some more time weeding out vendors dealing in exempt goods, differentiating between business and personal receipts, and so on.
A vegetable vendor from Haveri, was reported to have received notice demanding ₹29 lakh in GST dues, based on the sum of more than ₹1.60 crore being credited to his bank account through UPI in three years. While the system can flag a list of possible evaders based on receipt, some manual scrutiny is needed before such notices are sent.
To use or not
UPI has been growing at a breakneck speed in the last eight years and this growth will get checked once users become aware of the trail they are leaving with UPI. But then, it is not fair to allow UPI users to stay in the dark about this issue either. It would be best to run an awareness campaign first, highlighting the growth of UPI as well as talking about the linkage between UPI and the banking system. It can be explained to the users that black money can be curbed through UPI transactions. The increased awareness may lead to a temporary drop in UPI transactions and usage of cash can grow. But this is a more sustainable way to grow.
Another round of sensitisation and awareness needs to be conducted by the GST authorities, aimed at small vendors. They should be made aware of the benefits of registering with GST and claiming input tax credit, which can help them scale up their business in future. The composition scheme should also be explained to small businesses, encouraging them to register under it.
With growing inflation, many businesses, especially in urban areas, may now find their turnover exceeding the exemption thresholds. If they were made aware of the leeway available under the GST system, many may come forward to register, instead of living in constant fear of the taxman.
The tax authorities should begin mining the UPI data or going after small businesses, only after the awareness campaign has run for at least one year. Care should however be taken to ensure that the notices are sent to only those liable to pay GST, so that small businesses don’t feel unnecessarily threatened.
So, UPI data should certainly be used to flag tax evaders, but only once they are made aware of the possibility of tax query through these transactions. Ambushing naïve vendors with UPI data is a strict no.
Source from: https://www.thehindubusinessline.com/opinion/should-upi-data-be-used-to-track-gst-evaders/article69906854.ece
