UPI Growth and GST Compliance

UPI Growth and GST Compliance: The Growing Challenges for Small Businesses in India

India’s journey toward a cashless economy has been nothing short of revolutionary, and at the heart of this transformation lies the Unified Payments Interface (UPI). Over the past few years, UPI has evolved from a convenient peer-to-peer payment tool into the backbone of the country’s digital payment ecosystem. By 2025, UPI transactions have crossed staggering records, both in terms of volume and value, and now account for the majority share of retail digital transactions in India.

While this growth has cemented India’s reputation as a leader in real-time payment technology, it has also opened new avenues for tax authorities to monitor business activity more closely. The recent move by state tax departments to leverage UPI transaction data for detecting unregistered businesses has ignited widespread debate, particularly among small traders and vendors. This development brings into focus the fine balance between promoting digital adoption, ensuring tax compliance, and safeguarding the interests of small businesses.

The Rise of UPI: From Peer Payments to Business Backbone

When UPI was launched in 2016, its primary use was to enable quick transfers between individuals. However, its simple interface, instant settlement feature, and interoperability quickly made it a preferred mode for merchant payments as well. By FY 2025, merchant transactions had grown to form nearly one-third of total UPI volumes, with the rest being peer-to-peer transfers.

This digital shift has been so significant that other payment methods like NEFT have seen a noticeable decline in market share. Businesses, from large retail chains to roadside vendors, adopted UPI to cater to customer demand for quick, cashless transactions. However, this mass adoption also means that every payment leaves behind a clear digital footprint — a feature that is now central to the tax compliance debate.

UPI Data as a Tax Compliance Tool

Recognizing the transparency UPI transactions offer, state tax departments have begun analyzing this data to detect businesses operating without proper registration. Karnataka’s Commercial Taxes Department, for example, examined several years of UPI payment records to identify vendors whose transactions exceeded the Goods and Services Tax (GST) exemption threshold.

The threshold under GST is currently ₹40 lakh annual turnover for businesses dealing in goods and ₹20 lakh for service providers. If businesses cross these limits, they are required to register under GST and file regular returns. By comparing UPI transaction volumes with these thresholds, tax authorities identified thousands of traders who might be liable to pay GST but had never registered.

Authorities believe that if all unregistered taxable businesses are brought into the GST net, it could add more than ₹1.5 lakh crore to the country’s tax revenue annually. While this is a significant figure from a policy perspective, the approach has not been without controversy.

The Vendor Backlash and Ground-Level Impact

The use of UPI data for tax enforcement has sparked protests among small business owners. Many vendors, especially in rural and semi-urban areas, had been under the impression that UPI transactions worked like cash, leaving no official trail for tax purposes. This misconception led to shock and distress when tax notices arrived, in some cases demanding amounts far beyond the vendors’ actual profits.

Some vendors dealing in exempt goods such as fresh fruits and vegetables also received notices because they occasionally sold taxable items alongside exempt products. In many cases, the tax demands were calculated on the basis of gross UPI transaction values without accounting for exemptions, personal transfers, or returns — leading to inflated liability estimates.

This sudden enforcement drive has led to a noticeable behavioural shift: many small traders are now actively discouraging UPI payments, reverting to cash-only sales to avoid potential scrutiny. While this reaction is understandable from their perspective, it risks reversing the progress India has made toward a more transparent, cashless economy.

The GST Composition Scheme: A Missed Opportunity for Many

One way for small businesses to comply without heavy paperwork is through the GST Composition Scheme, available to businesses with turnover under ₹1.5 crore. Under this scheme, traders pay tax at a much lower rate and have to file simplified returns. Unfortunately, awareness about this option is still very low, especially among micro and unorganized sector vendors. Many who could have benefited from it either never registered or did so only after receiving compliance notices.

Awareness Before Enforcement: The Need of the Hour

While tax compliance is non-negotiable for any economy, the method of achieving it matters. Experts and business groups argue that before strict enforcement based on UPI data, authorities should prioritize awareness campaigns. These campaigns should explain:

• How UPI data is linked to business turnover.
• The GST exemption limits and how they apply to different types of goods and services.
• The benefits of voluntary GST registration, including input tax credits.
• The details of the Composition Scheme for eligible businesses.

Such efforts would not only reduce confusion but also build trust between small traders and tax authorities. A grace period — ideally one year — could be given for vendors to adjust to these requirements before strict enforcement begins.

Balancing Digitisation with Fair Taxation

UPI has been one of India’s greatest financial inclusion success stories, but its continued growth depends on user trust. If small vendors fear that every digital transaction might lead to excessive tax scrutiny, they may revert to cash, undermining the very purpose of digitisation.

The government thus faces a dual challenge:

1. Use UPI data effectively to widen the tax base and prevent evasion.
2. Ensure that enforcement is fair, proportionate, and accompanied by clear public communication.

Achieving this balance will require careful policy design, robust grievance redressal mechanisms, and a focus on long-term trust-building rather than short-term revenue gains.

Conclusion

The integration of UPI data into tax monitoring is a natural evolution in a digital economy. However, it must be implemented with sensitivity to the realities of India’s diverse business landscape. Small vendors are a vital part of the economic fabric, and while bringing them into the formal tax net is essential, it should not come at the cost of financial inclusion or digital adoption.

With proactive education, supportive policies, and a measured enforcement strategy, India can ensure that UPI continues to be both a driver of economic transparency and a tool for empowering small businesses — rather than a source of fear and financial strain.