In a one-of-its-kind enforcement action using digital trails, the Karnataka State Commercial Taxes Department is believed to have issued “show-cause notices to around 13,000 small taxpayers, including street vendors and micro-businesses, for alleged non-payment of GST,” sources told CNBC-TV18.The notices come after a six-month-long investigation into Unified Payments Interface (UPI) transactions made between FY2022 and FY2025.
The department reportedly “examined the transaction histories from leading apps such as PhonePe, Google Pay, Paytm, BHIM and others, correlating the digital inflows with GST registration records,” sources said on condition of anonymity.
The analysis revealed that many of these entities, though receiving substantial UPI payments, were not registered under GST despite having turnover above the statutory thresholds—₹20 lakh annually for services and ₹40 lakh for goods.“This move will have a ripple effect,” a senior government official, speaking on condition of anonymity, told CNBC-TV18.
“Now that Karnataka has shown the way, other states are likely to replicate this model and adopt similar methods. But this will also have downsides—it may push small vendors away from digital payments, reviving the cash economy, and worsen trust issues with the tax system. Many micro and small entities already avoid registration due to high compliance costs and complexity.”“This is likely to hurt the Digital India mission promoting cashless transactions and formalisation of the economy at the grassroots level,” said another senior official.Notably, post this enforcement drive, it is understood that a growing number of street vendors and micro-entrepreneurs, including those who have not yet received tax notices, have begun to refuse UPI payments, fearing scrutiny, said Bengaluru-based local residents, who have already seen the shift on the streets.Officials say, “the initiative aims to bring informal economic activities into the tax fold, but concerns are mounting over the potential chilling effect on digital payments, particularly in the unorganised sector. This development marks a significant evolution in India’s GST enforcement approach—from relying on traditional audits to AI-backed, transaction-level monitoring.”While the GST regime, introduced in 2017, was meant to simplify taxation, critics argue that small businesses continue to struggle with frequent filings, procedural burdens, and limited digital literacy.“Digitisation is a powerful compliance tool, but without simultaneous simplification, it risks penalising the very segment it seeks to formalise,” said a Bengaluru-based tax advisor. “Enforcement must be accompanied by education, support, and cost-effective compliance solutions.”The Karnataka initiative may be the precursor to a nationwide digital audit strategy, but its success will likely depend on whether it encourages inclusion or drives small players back into the shadows of cash-based trade.
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