DIGITAL TRACKS: An e-record of everyday transactions when cash goes out of the picture | Photo Credit: ALLEN EGENUSE J

In the bustling lanes of KR Market, one of Bengaluru’s most vibrant wholesale centres, an unusual sight has emerged. Hand-scrawled signs reading “UPI not accepted” now dot vendor stalls where once QR codes were proudly displayed as a payment option. A symbol of India’s digital payment revolution is now a source of anxiety for thousands of small traders across Karnataka.

The crisis unfolded in early July when nearly 9,000 notices were issued across the State, directed at small businesses whose UPI transactions exceeded registration thresholds. The flashpoint came when 48-year-old Shankargouda Hadimani, a vegetable vendor from Haveri, received a notice demanding ₹29 lakh in GST dues — a sum that represents years of earnings for someone selling vegetables on the street.

Double-edged data

The Karnataka Department of Commercial Taxes had been quietly mining UPI transaction data from 2022 to 2025, flagging unregistered businesses that received annual digital payments exceeding ₹40 lakh for goods or ₹20 lakh for services. What officials described as routine inquiries felt like tax raids to small traders who had embraced digital payments during the pandemic, only to find their financial transparency working against them.

The notices also demanded detailed documentation that most small businesses rarely maintain — namely purchase bills, vendor registration documents, and bank statements spanning several years. For a vegetable vendor who operates on daily cash flows and seasonal cycles, the idea of maintaining such records appeared as baffling as the tax regulations.

The scale of the crisis became evident when even businesses dealing in exempt goods found themselves in the crosshairs. A meat seller received a ₹91 lakh notice despite having claimed exemption and never registering under GST. The disconnect between tax exemptions on paper and digital surveillance created a perfect storm of confusion and fear.

Digital reversal

The reaction was swift and dramatic. Across Bengaluru, traders began rejecting the very payment system that once liberated them from the hassle of handling cash. Rakesh (name changed on request), a flower vendor, summed up the mood with the signage “No UPI, Only Cash” at his stall.

“Some of my regular customers are unhappy, and sales have gone down,” he concedes. “But I had no choice after receiving a GST notice. Many vendors like me are shocked.”

The ripple effect extended beyond traders to auto-rickshaw drivers like Vinay (name changed), who received a GST demand for nearly ₹4.5 lakh.

“Now many of us are asking customers for cash to avoid further problems,” he says, highlighting how the fear of leaving digital footprints is reshaping everyday transactions.

Consumer conundrum

Consumers grown accustomed to the convenience of digital payment, even for tiny sums, suddenly found themselves forced to carry cash. College student Ragini says vendors in her neighbourhood stopped accepting UPI payments.

“Even auto drivers are now requesting cash payments. Carrying cash again is a hassle,” she complains, echoing the feelings of thousands of young Indians who have barely known a cash-heavy economy.

The irony wasn’t lost on observers — a State at the forefront of India’s digital transformation now witnessing a voluntary retreat from the very technologies it champions.

Way forward

Karnataka Chief Minister Siddaramaiah stepped in with assurances that no taxes would be collected from those dealing in exempt goods such as milk, vegetables, meat, and fruits. More significantly, he announced that old tax arrears would not be pursued, provided traders register under GST and pay taxes going forward.

“The government is committed to supporting small traders while ensuring lawful business operations,” Siddaramaiah said, announcing enhanced support for timely tax payments and improved helpline accessibility.

The Karnataka crisis reflects a fundamental tension in India’s digital economy.

As Harpreet Singh, Partner at Deloitte India, explained: “GST is not charged on the sale of fresh fruits and vegetables (except when packaged and labelled). However, when payments are made through banks or digital channels, tax officials closely review these transactions. If sales cross a certain limit, the tax department may ask for proof and records to verify the business.”

“The reason small vendors are receiving GST notices is due to algorithm-based triggers, where UPI transactions are assumed to be business income. But in reality, not all UPI inflows are taxable supplies — many include personal transfers or small one-time services. Without context or verification, sending legal notices creates fear and drives micro-entrepreneurs back into the informal cash economy,” says Sandeep Sehgal, Partner-Tax at tax and consulting firm AKM Global.

He adds that small vendors should include the total value of all taxable business supplies received across all modes — cash, UPI, bank transfers, and so on — when calculating their turnover.

“However, non-business payments like personal transfers, loans, or reimbursements should not be counted. The difficulty arises because many small traders do not maintain detailed records, and distinguishing between business and non-business income can be challenging without professional assistance. This makes compliance more difficult and expensive for those not familiar with the tax system,” he explains.

Karnataka, which ranks second in India in GST collection and shares 50 per cent of its revenue with the central government, found itself balancing between tax compliance and the practical realities of small-scale commerce. The State’s experience offers lessons for other regions grappling with similar issues even as digital payment grows in popularity.

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Published on August 4, 2025