Impact of UPI Transactions on GST Compliance: Guidance for Small and Medium Traders
Created By :
Ikesh Nagpal | Head- Indirect Taxation
Caught in the Digital Net: Why GST Notices Are Rising for Small Businesses?
Recently, there has been a significant surge in GST notices issued to small and medium vendors because of digital transaction volumes. These notices are creating anxiety and confusion among vendors as the department has started issuing GST notices based on digital data from 2021-22 onwards. To address the situation effectively, it is important to have proper clarity and timely compliance.
What’s the Actual Issue: Turnover and GST Registration
Under the GST law, businesses are usually required to obtain GST registration if their aggregate turnover in a financial year exceeds Rs. 40 lakhs (goods) and Rs. 20 lakhs (services). With increased adoption of digital mode of payments, tax authorities now have an unprecedented digital trail of transactions from year 2021-2022 onwards. The department is now leveraging this data to identify unregistered entities or vendors whose gross UPI receipts suggest a turnover potentially exceeding the prescribed limits.
Earlier in the month of July 2025, the Commercial Taxes Department had identified thousands of small and medium vendors whose turnover ranged from Rs. 2 Cr to Rs. 5 Cr without GST registration and issued notices seeking explanation. These instances have prompted widespread fear and fury among the traders across the country, especially in cities like Bengaluru and Mysuru. There has been a noticeable drop in digital transactions following the unexpected wave of surprise GST notices.
Why the Sudden Panic?
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Lack of Awareness: Numerous small traders are unaware of the consequences of increased UPI usage. They embraced digital payments as part of the “Digital India” initiative, believing it to be a convenient and tax-free mode of payment.
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Personal v. Business Transactions: It is a common practice to use a single UPI account for both personal as well as business transactions. Mixing personal and business transactions often makes it hard for tax authorities to separate actual business income from personal payments like loans or transfers. Providing a clear explanation for each transaction becomes difficult, leading to inflated turnover estimates.
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Exempt Goods: Many small vendors specifically trade in goods that are exempt from GST, such as fruits and vegetables. Tax authorities have issued notices to such vendors also based on gross transaction volume, requiring vendors to prove their exemption.
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Retrospective Demands: The notices are being issued from 2021-2022 and are particularly creating panic among the vendors who may not have kept thorough records.
Government’s Response to the Ongoing Distress
The government has said that the notices are mainly for clarification, asking vendors to explain the increase in turnover due to digital payments. Even those dealing in exempt goods are being asked to prove that their income comes from such items.
However, the authorities acknowledge that there was a lack of awareness earlier, but they are now trying to rectify it though several awareness campaigns. They have also launched a “Know GST” campaign and set up helplines to educate traders.
Practical Steps to Respond, Comply, and Stay Stress-Free
The current situation is alarming and demands a more sensitive and trained approach towards the enforcement of GST. It reflects a wider push towards streamlining compliance among the traders. Here are some ways to handle these notices effectively:
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Do Not Ignore the Notice: The GST authority needs vendors to respond to their notices before the end of their specified deadline which ranges between 7 to 15 days. Failure to address such notices results in additional procedures which could end in penalty assessments and best judgment evaluations. A tax consultant should be contacted immediately after receiving the notice to ensure a timely response.
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Reconcile Digital Transactions: Verify UPI and bank transactions to clearly separate between business income and personal transactions, loans and refunds. Accurate business turnover depends on the proper segregation of business data. It is beneficial to maintain an Excel sheet with entry notes supported by relevant documents (e.g., loan agreements, invoices, delivery notes) whenever possible.
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Document Exempt Supplies: When dealing with exempt goods or services, it’s important to maintain proper documentation. This includes:
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Bills and invoices that clearly show the nature of goods (e.g., fresh produce)
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Photographs of the goods being sold
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Details of the stall/shop location, especially if operating in local markets where only exempt items are sold
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Procurement records from suppliers
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File a Response with Proper Explanation: The appropriate response to GST notices must be made within the specified time frame. Ignoring GST notices will not solve the problem and may lead to higher penalties and best judgment assessments by the authorities. The practice of reducing or avoiding digital payments for future transactions also does not remove existing tax responsibilities.
The most effective solution involves visiting the local GST office, if needed, and providing all relevant documentation related to the transactions under review. A properly explained response – including bank statements, a clear separation of personal and business transactions, and records proving the exempt nature of goods – can solve the issue without any tax complications or penalties. The department often closes the matter when proper documentation and evidence of genuine compliance are presented.
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Seek Professional Help: The legal and technical complexities of GST make it essential to seek assistance from qualified GST practitioners or Chartered Accountants when dealing with retrospective matters.
To sum up, while digital transactions are here to stay, it's critical for small vendors to adapt to the evolving compliance landscape. Timely responses, clear documentation, and professional guidance can help prevent penalties and ensure smooth business operations. Staying informed is no longer optional—it’s essential and we are here to help.
For any queries related to GST notices, registration or compliance matters, reach out to us at info@akmglobal.in.