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The Commercial Tax Department from the state of Karnataka has taken a peculiar step utilizing digital payment systems. As per information gathered by CNBC-TV18, the department has issued “show cause notices” to approximately 13,000 small taxpayers for not remitting GST. The taxpayer's roster includes roadside vendors and small scale entrepreneurs.

This action has been taken after an analysis of Unified Payments Interface (UPI) transactions spanning from the fiscal year 2022 through to 2025. It was reported that the department analyzed the payment transaction data from big UPI service providers such as PhonePe, Google Pay, Paytm, and BHIM, and cross-referenced it with GST registration records.

Investigations showed that many of these small traders who received significant UPI payment were not registered under the GST. However, they certainly seemed to exceed the threshold of Rs 20 lakh for service-based revenue and Rs 40 lakh for goods sales.

What consequences did this action cause?

A government official shared with CNBC-TV18, off the record, “This will have significant repercussions. Karnataka has pioneered it, and now other states can follow suit. It has a negative side too – because of this, small traders might abandon digital payments and revert to cash, which would undermine faith in the taxation system.”

Risks to Digital India Initiative

One of these senior officials voiced: “This action will impact the Digital India initiative. The focus of this initiative is on the cashless economy and digitization of the economy.” Residents of Bengaluru say that a number of street vendors and small business people who have not received any notices are starting to avoid using UPI out of panic.

Effect on informal sector

While officials claim the objective of this proposal is to integrate informal economic activities into the tax system, they concede it could mute the incentive to make digital transactions within the informal sector.

Issues with GST

The introduction of the GST system in 2017 was meant to simplify the taxation framework. However, critics argue the numerous filing requirements, complicated procedures, and minimal online literacy are burdening small businesses.

A tax consultant based in Bangalore stated, “Digitization can serve as a powerful compliance tool, but lacking in accompanying simplification can hurt small traders who are being encouraged to formalize.”

 


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