UPI Payments Under GST Radar: What Small Merchants Must Know

A bustling street market in Karnataka filled with vendors displaying colorful goods, including fruits and vegetables. People are seen walking through the market, showcasing a vibrant local shopping scene.

The issue of small merchants in Karnataka receiving GST notices due to high UPI-based receipts — even if they are unregistered — raises important legal considerations under the GST law. Here’s an analysis based strictly on the relevant GST legal provisions:

Legal Analysis under GST Law:

1. Threshold for GST Registration:

Under Section 22(1) of the CGST Act, 2017:

“Every supplier shall be liable to be registered under this Act in the State… if his aggregate turnover in a financial year exceeds ₹20 lakh (₹40 lakh for goods, subject to notification).”

  • As per Notification No. 10/2019–Central Tax dated 7th March 2019 and subsequent state notifications, for suppliers exclusively supplying goods, the threshold is ₹40 lakh in many states including Karnataka.
  • However, for supply of services or mixed supply, the ₹20 lakh threshold generally applies.

Therefore, any person (trader/merchant) whose aggregate turnover from taxable supplies exceeds the threshold must register under GST.

2. Meaning of Aggregate Turnover:

Defined under Section 2(6) of the CGST Act:

“Aggregate turnover means the aggregate value of all taxable supplies (excluding inward supplies under RCM), exempt supplies, exports of goods or services or both, and inter-State supplies… computed on all-India basis…”

  • Includes UPI receipts if they relate to supply of taxable or exempt goods/services.
  • Even if the person receives payments digitally (like UPI), those receipts form part of aggregate turnover.

3. Liability for Unregistered Dealers Accepting UPI Payments:

  • If a trader is unregistered and still makes taxable supplies exceeding the threshold — say via UPI or cash — they are liable to pay GST, register and file returns.
  • Non-registration is a violation under Section 122(1)(xi) of the CGST Act, 2017 which attracts penalty up to ₹10,000 or the tax evaded, whichever is higher.

4. Composition Scheme:

Section 10 of CGST Act:

  • If turnover is up to ₹1.5 crore (in most States), one can opt for a Composition Scheme (subject to other conditions).
  • They pay a nominal tax rate (like 1%) and file simpler returns.
  • However, composition dealers cannot collect tax, cannot issue tax invoices, and must mention ‘composition taxable person’ on their bill.

Many small traders may be eligible for this and avoid complications if properly registered.

5. Exempt Goods and Services:

If a person deals only in exempted goods/services, then even if turnover exceeds ₹40 lakh, they need not register. Examples include:

  • Fresh fruits/vegetables (as per Notification No. 2/2017-CT(R))
  • Services like education, health care, and certain charitable activities (as per Notification No. 12/2017-CT(R))

However, this must be established by the assessee upon receiving a notice.

Conclusion:

The Karnataka GST department is within its rights to:

  • Scrutinize traders receiving ₹40+ lakh via UPI, and
  • Issue notices to verify registration, compliance, and eligibility for exemption or composition.

But mere receipt of UPI payments does not by itself trigger GST unless the supply is taxable and threshold is crossed.

Merchants must:

  • Maintain books and classify transactions correctly.
  • Respond to notices with proper documentation (e.g., proof of exempt goods, composition declaration, etc.).
  • Seek GST registration if liable.

Advisory to Traders:

  • Do not panic on receiving notices — respond with clarity and consult a GST practitioner or CA.
  • Explore the composition scheme if eligible.
  • If only exempt goods/services are supplied, maintain clear records.