Rewind: No UPI, Only Cash – digital inclusion vs GST enforcement

GST notices generated by UPI data sparked protests across Karnataka, exposing how data-led enforcement —without context or support — can undermine trust in Digital India

By Anuradha PS, Divyashree

Shankargouda Hadimani, a fruit seller in Karnataka, was jolted by an unexpected GST notice of Rs 29 lakh in July 2025. His business dealt in fresh fruits, goods largely exempt from GST. What he had adopted as a symbol of progress and a step towards Digital India— a QR code —suddenly became the basis of scrutiny.

Hadimani was not alone. According to reports, thousands of small traders across Karnataka — from fruit vendors in Bengaluru to home-based tailors in smaller towns — received similar notices generated from a few years of UPI transaction data.

Panic soon turned into protest. Trader groups displayed boards that read “No UPI – Only Cash” and called for a statewide bandh. The episode shows how, in the absence of contextual governance, digital financial visibility under India’s GST regime can reproduce structural inequities.

The Unified Payments Interface (UPI), launched in 2016, marked a watershed moment in India’s digital transformation. As a real-time payment system built on interoperability, simplicity, and scalability, UPI has enabled over 16.99 billion transactions per month and brought millions of Indians — particularly those in the informal sector — into the fold of digital finance. Vendors, hawkers, auto drivers, and micro-enterprises, once operating entirely in cash, began to embrace QR codes, riding on the promise of transparency, convenience, and legitimacy.

Yet recent developments in Karnataka suggest that this shift toward a cashless economy, while technologically robust, is being undermined by regulatory overreach and economic insensitivity.

Data without Context

While UPI has vastly expanded transaction traceability, Karnataka’s Commercial Taxes Department reportedly treated aggregate UPI receipts as a proxy for annual turnover, triggering GST registration notices for vendors whose receipts crossed Rs 40 lakh for goods and Rs 20 lakh for services under Section 22 of the GST Act. In doing so, the state failed to filter tax-exempt transactions or distinguish the purpose of inflows.

Data from the Reserve Bank of India’s Digital Payments Index show digital transactions rose 10.7 per cent year-on-year in March 2025, with UPI accounting for 83 per cent of volumes. As digital footprints expand, the challenge is no longer visibility, but interpretation.

While authorities maintained that the notices were only preliminary and open to clarification, limited digital literacy and the absence of accessible legal assistance created confusion and anxiety among traders.

Under the Central Goods and Services Tax Act, 2017, particularly Sections 150 and 151, tax authorities are empowered to collect third-party data from financial intermediaries. Read alongside provisions of the Prevention of Money Laundering Act and the Information Technology rules, such data can be used to detect evasion and enforce compliance.

Uneven Enforcement

The concern lies not in the law itself but in its application. The central flaw is the equation of gross UPI transaction values with annual turnover, without distinguishing business revenue from peer transfers, inventory reimbursements, or refunds.

For instance, a vendor receiving Rs 5,000 a day through UPI may not be earning that amount as income. Some of that may be recycled cash flow; some may not even be business-related. In the absence of formal accounts — something most informal workers are ill-equipped to maintain — these traders are deemed liable for GST registration or past dues. The result is a surge in confusion and anxiety, most concerningly accompanied by growing mistrust in digital platforms.

Although India’s fintech ecosystem has grown rapidly, regulatory frameworks have struggled to keep pace, resulting in a mismatch between innovation and oversight. Large enterprises have teams to manage tax compliance, accounting tools, and legal advisers. A street vendor in Chamarajanagar or a pushcart seller in Mandya does not. Expecting such individuals to retrospectively account for their digital income, in the absence of systemic guidance, imposes an asymmetric compliance burden, rendering the process inherently regressive. Tax experts have argued that notices were issued without isolating exempt commodities or verifying the nature of transactions.

A 2025 NIPFP study on GST’s distributive implications shows that while the taxation system is generally progressive, informal vendors do not have the resources and knowledge and hence struggle with compliance.

Lessons from Other Countries

Globally, digital tax enforcement models offer a contrasting lesson. Brazil’s São Paulo Tax Invoice programme, for instance, used digital receipts and fiscal invoices to combat evasion. Consumers were incentivised to request e-receipts, and businesses submitted sales data in real time. Rather than being punished, vendors were supported with streamlined systems, and consumers were rewarded with tax credits and monthly lottery entries. The focus remained on consumer-led accountability and gradual formalisation.

In China, taxation relies on electronic invoicing ‘fapiao’) via the Golden Tax System, with simplified provisions for small taxpayers. Enforcement hinges on invoice issuance and registration, not on raw mobile payment data.

Kenya serves as a warning about the risks of overreach. When the Kenya Revenue Authority tried to expand access to M-PESA (Mobile money) transaction data, Parliament stepped in and stopped it, saying it would violate people’s privacy. Instead of monitoring all mobile payments, the focus remains on tracking registered business accounts through its eTIMS (Electronic Tax Invoice Management System).

South Korea, often cited for its digital governance excellence, pursued the opposite strategy: rewarding businesses and individuals who adopted digital modes with tax deductions and compliance credits.

Across these cases, the consensus is clear — successful digital tax integration requires incentives, transparency, phased implementation, and robust support structures. Enforcement alone, particularly based on unverified transaction data, not only erodes trust but actively incentivises withdrawal from digital systems.

Visibility Sans Support

The Karnataka crisis serves as an example that digital payment information is not tax records. In the absence of interpretive frameworks and participatory grievance redress mechanisms, fiscal formalisation can breed alienation rather than inclusion. As merchants begin rejecting UPI payments, both consumers and traders drift back to cash, undermining the very financial ecosystem envisioned under Digital India.

From a public finance standpoint, widening the tax net is valid. India’s informal sector remains vast and under-taxed, and expanding the GST base can help achieve revenue stability. However, the pathway to formalisation must be carefully sequenced. Enforcement that precedes education, documentation support, and grievance redressal risks eroding the credibility of the digital inclusion narrative.

Legal authority, though necessary, must be exercised with economic realism. UPI data can be immensely useful for long-term policy design, but it should not become the sole trigger for statutory action.

Transaction volumes, especially in cash-thin, margin-low trade, cannot substitute for robust accounting. Without safeguards, such use of data will yield false positives, deter adoption, and further blur the lines between the formal and informal sectors.

Policymakers must adopt a phase-wise approach where small vendors are first identified, then educated, and only thereafter subjected to structured onboarding into the formal tax regime. Minimum exemption thresholds must be redefined in a way that recognises net income and transaction quality, not just quantity.

State and central governments should set up community-based GST helpdesks with multilingual support and simplified filing mechanisms. A safe-harbour compliance window could be introduced to allow voluntary registration without retrospective penalties, provided certain conditions are met. Moreover, fintech firms and digital wallet companies should be mandated to classify transaction types more accurately so that payment data reflects economic activity rather than raw flows.

In parallel, a policy advisory council comprising trade bodies, fintech firms, tax professionals, and MSME representatives should be set up to assess the unintended consequences of current compliance practices. India’s digital economy cannot thrive if its foundational users — its smallest entrepreneurs —begin to exit the system out of fear, confusion or exhaustion. The true strength of Digital India lies not in the scale of its platforms, but in the trust and participation of its people.

To avoid recurrence, the GST department should

• Introduce pre-notice risk filters that have commodity exemptions and the nature of transactions
• Roll out regional-language education and outreach before initiating enforcement
• Set up a dedicated dispute portal and helpline for small vendors
• Adopt a graded adherence model: start advisories and assistance, followed by structured enforcement only where necessary

Inclusion Before Enforcement

Over 90% of India’s workforce is employed in the informal sector. Forcing digital visibility without the necessary safeguards will only deepen distrust. Formalisation of the fiscal must place inclusion and consultations on top of their agenda, ensuring that digitisation serves as an instrument of empowerment rather than alienation.

Karnataka’s experience stands as a cautionary tale. It reminds us that even the best-designed digital systems must be accompanied by thoughtful governance. If UPI was born as an instrument of empowerment, it must not be allowed to turn into a tool of exclusion. A truly cashless economy is not just about access — it demands understanding, meaningful application, and sustained engagement. The government’s approach must extend beyond taxation to prioritise education, support, and engagement. Only then can the vision of financial inclusion be realised in both spirit and practice.

(Anuradha PS is Professor, CHRIST (Deemed to be University), Bengaluru, and Divyashree is Professor, Alliance Ascent College, Alliance University, Bengaluru)