UPI Data and Tax Compliance Challenges in Small Businesses
The rapid rise of Unified Payments Interface (UPI) usage in India has transformed digital payments. By 2025, UPI transactions reached ₹260 lakh crore annually, capturing 28% of retail payments. However, this surge has presented new challenges for tax authorities and small vendors. The Karnataka Commercial Taxes Department’s use of UPI data to identify tax evaders sparked protests from small traders. This situation marks the complex balance between digitisation, transparency, and the concerns of small businesses.
UPI Growth
UPI started as a peer-to-peer payment method but has expanded to merchant payments. In FY25, 70% of UPI transactions were peer-to-peer and 30% peer-to-merchant. The share of NEFT payments declined from 61% in FY18 to 48% in FY25, showing a shift towards instant digital payments. This growth reflects convenience but also creates a digital trail for all transactions.
Tax Authorities Using UPI Data
Tax departments now mine UPI data to detect unregistered businesses and tax evasion. Karnataka’s department analysed payments above GST exemption limits from 2022 to 2025. Notices were sent to thousands of small vendors suspected of evading taxes. This approach can potentially increase GST revenue by ₹1.5 lakh crore if unreported taxable sales are identified and taxed properly.
GST Exemptions and Small Vendor Concerns
GST exempts small businesses with turnover under ₹40 lakh for goods and ₹20 lakh for services. Many vendors selling exempt goods like fresh fruits and vegetables are not liable for GST. However, vendors selling taxable items alongside exempt goods may owe taxes. The composition scheme offers a simplified tax option with lower rates for businesses with turnover under ₹1.5 crore, but many small vendors remain unaware or fearful of compliance.
Challenges Faced by Small Vendors
Many vendors mistakenly believe UPI payments are like cash with no audit trail. This misconception leads to surprise notices demanding large tax payments based on aggregated UPI transactions. Some vendors received demands far exceeding their actual business scale, causing distress. Tax authorities’ data mining methods require refinement to distinguish exempt sales and personal transactions from taxable business income.
Awareness and Sensitisation Measures
Before strict enforcement, authorities should launch awareness campaigns explaining the link between UPI data and tax compliance. Educating vendors on GST benefits, input tax credits, and the composition scheme can encourage voluntary registration. Transparent communication can reduce fear and encourage cooperation. A grace period of at least one year for awareness is recommended before issuing tax notices based on UPI data.
Balancing Digitisation and Fair Taxation
UPI’s growth is a success story but may slow if users fear digital trails. Transparency is essential to curb black money and expand the tax base. Careful use of UPI data with prior sensitisation can ensure fair taxation without harassing small businesses. The government faces a dilemma – use data for better compliance or risk pushing users back to cash.
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