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The recent actions by several state commercial tax departments, beginning with Karnataka and now including Andhra Pradesh, Uttar Pradesh, Tamil Nadu, and Gujarat, to request merchant transaction data from Unified Payments Interface (UPI) apps and payment aggregators are sending ripples of concern throughout the digital payments ecosystem in India. The core issue stems from the interpretation of UPI transaction data as a direct indicator of turnover for Goods and Services Tax (GST) registration purposes. According to government regulations, merchants with an annual turnover exceeding Rs 40 lakh are required to register for GST. The tax departments are leveraging UPI transaction data, which is readily available from digital payment platforms, to identify potentially non-compliant merchants. This initiative, while seemingly aimed at broadening the GST tax base and ensuring compliance, is sparking considerable resistance and fear among small traders. The primary concern revolves around the accuracy of using UPI data to determine GST liability. Not all transactions processed through UPI are necessarily subject to GST. Many small businesses, particularly those dealing in essential goods like groceries and food items, often handle products that are either exempt from GST or fall under lower tax brackets. Simply equating total UPI receipts with taxable turnover is seen as a flawed and potentially unfair approach. This apprehension is further compounded by the limited understanding of tax laws and accounting principles among many small merchants, who often struggle to differentiate between gross turnover and actual profit. The result is a wave of panic and a growing distrust of digital payment methods, which could significantly undermine the progress made in promoting a cashless economy. The Karnataka situation serves as a stark example of the potential fallout. Small traders across the state, including those involved in condiments, bakeries, and tea and coffee shops, have threatened a statewide shutdown in protest against the GST demand notices issued by the Commercial Tax Department. They argue that the notices are based on inaccurate assessments and impose an undue burden on their businesses. The traders are demanding that the state government withdraw the notices and adopt a more nuanced approach to GST compliance. As a sign of protest, they have even threatened to halt the sale of milk-based products, a symbolic gesture highlighting the impact of the tax demands on their livelihoods. The trade bodies representing these merchants have reached out to both the tax department and the UPI apps in an attempt to find a resolution through dialogue and negotiation. However, the situation remains tense, and the threat of widespread disruption looms large. The move by the state tax departments is also raising concerns about the potential for increased reliance on cash transactions. Faced with the prospect of increased scrutiny and potential tax liabilities, many merchants are considering reverting to cash-based transactions to avoid leaving a digital trail. This shift could negate the significant gains made in promoting digital payments, which have become increasingly popular among consumers and businesses alike. UPI, in particular, has emerged as the country's most favored digital payment method, processing billions of transactions every month. Merchant payments account for a substantial portion of these transactions, highlighting the widespread adoption of UPI among small businesses. If merchants begin to shun UPI in favor of cash, the impact on the overall digital payments ecosystem could be significant. The UPI apps themselves are facing a growing merchant pushback as a result of the GST notice scare. Many merchants, fearing increased scrutiny and potential tax liabilities, are cancelling their subscriptions to merchant apps and UPI payment enablers like soundboxes and point-of-sale devices. This trend is particularly concerning because it suggests a fundamental erosion of trust in the digital payments infrastructure. The leading UPI merchant acquirers, including Paytm, PhonePe, Google Pay, and BharatPe, are reporting an increase in calls from shopkeepers seeking to terminate their subscriptions. While many merchants are still weighing their options, the potential for a mass exodus from digital payments remains a real threat.
The issue is further complicated by the inherent limitations of using UPI data to determine GST liability. As pointed out by a senior banker, the turnover data derived from UPI transactions does not necessarily reflect the composition of goods for which GST is applicable. Many small businesses deal in a mix of taxable and non-taxable items, and simply assuming that all UPI receipts are subject to GST is a flawed and potentially inaccurate approach. This move is creating unnecessary panic and will create ill will towards digital payments, the banker added. Moreover, the lack of awareness and understanding of tax laws among many small merchants exacerbates the problem. Many merchants struggle to differentiate between gross turnover and actual profit, and they may not be fully aware of their GST obligations. This lack of understanding can lead to confusion and fear, which further fuels the resistance to digital payments. The aggressive enforcement of GST regulations, without adequate education and support for small businesses, is seen as counterproductive and potentially harmful to the overall economy. The Commissioner of Commercial Taxes in Karnataka has acknowledged that some merchants may attempt to evade taxes by using multiple UPI accounts, including those of family members and friends, to receive payments. However, the department has stated that it is aware of these tactics and will be vigilant in monitoring such activities. In one instance, officials discovered 30 UPI QR codes and transactions worth Rs 1.47 crore at a popular biryani outlet, highlighting the potential for tax evasion through the misuse of UPI. While the government's intention to crack down on tax evasion is understandable, the approach taken by the state commercial tax departments is raising concerns about its fairness and proportionality. Many argue that a more educative and collaborative approach, rather than an aggressive enforcement strategy, would be more effective in promoting GST compliance among small businesses. Sajjan Raj Mehta, a trade activist, has argued that GST was introduced to simplify taxes and promote ease of doing business, but aggressive enforcement has created fear among genuine taxpayers. He emphasizes that most traders are honest and need guidance, not harassment. Inspections should be educative, not intimidating, and officers must act as facilitators, not enforcers. The case of a Pani Puri vendor in Tamil Nadu who was served a GST notice after UPI payments to his stall crossed Rs 40 lakh serves as a cautionary tale. The authorities found that the vendor had not registered under the TNGST and CGST Acts, despite a turnover in FY 2023-24 that was more than twice the GST threshold. This case highlights the potential for unintended consequences of aggressively pursuing GST compliance, particularly among small businesses that may lack the resources and expertise to navigate the complexities of the tax system. The reliance on UPI data as a primary indicator of GST liability raises fundamental questions about the accuracy and fairness of the enforcement process. Simply equating UPI receipts with taxable turnover can lead to inaccurate assessments and undue burdens on small businesses. A more nuanced approach, taking into account the composition of goods sold and the actual profit margins of businesses, is needed to ensure that GST is applied fairly and equitably. Moreover, greater efforts are needed to educate small businesses about their GST obligations and provide them with the resources and support they need to comply with the regulations. This includes simplifying the registration process, providing clear and accessible information about GST laws, and offering training programs to help merchants understand their responsibilities.
The situation is further exacerbated by the fact that many small merchants prefer UPI over other digital payment methods because it does not charge a merchant commission, also known as Merchant Discount Rate (MDR), which is applied on card payments. This makes UPI a more attractive option for small businesses that are sensitive to transaction costs. However, the recent actions by state commercial tax departments are undermining this advantage and pushing merchants to consider alternative payment methods, including cash. The reliance on cash transactions not only makes it more difficult for officials and banks to track payments but also undermines the government's efforts to promote a cashless economy. The situation is further complicated by the fact that many small merchants are now considering using their own as well as their relatives' savings bank accounts for receiving UPI payments instead of the merchant's current account. This makes it even more difficult for officials and banks to track payments and identify potential tax evasion. The Commissioner of Commercial Taxes in Karnataka has acknowledged that the department is aware of such tactics and will keep an eye out for such activities by large merchants. However, it is unclear how effective these efforts will be in preventing tax evasion. The long-term consequences of the actions taken by state commercial tax departments could be significant. The growing distrust of digital payment methods and the potential for increased reliance on cash transactions could undermine the progress made in promoting a cashless economy. Moreover, the aggressive enforcement of GST regulations, without adequate education and support for small businesses, could stifle economic growth and create unnecessary hardship for small traders. A more balanced and collaborative approach, focusing on education, guidance, and fair enforcement, is needed to ensure that GST is applied effectively and equitably. The government should also consider providing incentives for small businesses to adopt digital payment methods and comply with GST regulations. This could include tax breaks, subsidies, or other forms of financial assistance. Ultimately, the success of GST depends on the cooperation and compliance of all stakeholders, including small businesses. By working together, the government and the business community can create a tax system that is fair, efficient, and conducive to economic growth. The current situation highlights the need for a more nuanced and collaborative approach to GST enforcement. The government should prioritize education and guidance over aggressive enforcement, and it should work with small businesses to ensure that they understand their GST obligations and have the resources they need to comply with the regulations. By fostering a culture of trust and cooperation, the government can create a tax system that is fair, efficient, and conducive to economic growth.
Source: After Karnataka, four more states request merchant transaction data from UPI apps