From QR Code to Court: The UPI-GST Showdown

In an age where "Scan & Pay" is the new handshake, traders across India now face an unexpected knock on the digital door-GST notices triggered by their UPI activity. Over 6,000 small businesses have received demand notices from GST departments, alleging that their UPI transactions reflect turnover exceeding registration thresholds. The twist? Many of these businesses never registered for GST because they believed their earnings were exempt, personal, or simply non-business in nature.

I. Setting the Digital Stage: What’s the Issue?

The controversy began when a state GST department, using data analytics and AI tools, matched UPI inflow data with GST registration records. Thousands of traders were flagged for receiving payments exceeding Rs.20 lakh (or Rs.40 lakh in some states)-the threshold for mandatory GST registration. These traders were issued show-cause notices alleging evasion or non-registration.

But there's a problem: Not all digital receipts are equal.

Some common examples of what UPI receipts may include:

Yet the notices often treat all UPI credits as taxable supply turnover-akin to judging your income by your Swiggy wallet balance.

II. Understanding the Legal Framework

Section 2(112), CGST Act: What is Aggregate Turnover?

The cornerstone of GST registration lies in the definition of "aggregate turnover" under Section 2(112) of the CGST Act, 2017. It includes:

but notably excludes:

Crucially, the law defines turnover by "supplies"-not bank or UPI receipts.

The supply must satisfy Section 7 of the Act, which includes sale, barter, exchange, lease, etc. If money is received without a corresponding supply (e.g., a gift), it doesn't count toward turnover.

III. Legal Defenses Available to Traders

1. Natural Justice (Section 75(4), CGST Act)

Every taxpayer has a right to be heard before a demand is finalized.

If:

Then the entire proceeding may be vitiated.

Case Reference: Maruti Enterprise v. State of Gujarat [2025(07)LCX0090] Held: Non-service of detailed SCN violates natural justice.

2. Doctrine of Legitimate Expectation

When authorities historically didn’t object to the use of UPI for personal and mixed-use accounts, issuing sudden notices without any prior warning may breach legitimate expectations.

Case Law: Union of India v. Hindustan Development Corp. (1993)

3. No Penalty Without Mens Rea (Section 126, CGST Act)

Penalties under GST cannot be mechanical. They must account for:

Law says: Penalty can’t be imposed for genuine mistakes or without proof of fraud/suppression.

4. Doctrine of Proportionality & Article 14

Blanket treatment of all UPI users as tax evaders violates Article 14 of the Constitution.

Case Reference: Commissioner v. Hindustan National Glass (2005(03)LCX0015)

Arbitrary classification of traders based on mode of receipt is discriminatory and disproportionate.

5. UPI ≠ Turnover (Section 2(112), read with Schedule III)

Not all receipts are "supplies." For example:

6. Reasoned Show-Cause Notices are Mandatory

Boilerplate notices without transaction-wise details violate procedural fairness.

Case Reference: M/s D.Y. Beathel Enterprises v. STO (2021(02)LCX0204) Held: Show-cause notice must include specific grounds and evidence.

IV. What Should Traders Do Now?

Receiving a GST notice doesn’t mean you're guilty. It means you're required to respond-and that too strategically.

Step-by-step Action Plan:

1. Don’t panic-but don’t ignore either.

2. File a timely reply to the notice (within 15–30 days).

3. Attach documentary proof:

4. Explain transactions:

5. Cite legal grounds mentioned above.

6. Engage a GST practitioner or CA if needed.

V. Fiction Meets Fact: Some Hypothetical Examples

Case 1: The Fruit Vendor

Kamleshbhai, a roadside fruit seller, received Rs.22 lakh via UPI in FY 2023-24. All of it for exempt goods-fruits.

Defense:

Case 2: The Tuition Teacher

Sneha runs private tuitions and receives Rs.18 lakh annually through UPI. The department adds Rs.5 lakh of family remittance to her "turnover."

Defense:

Case 3: The Housing Society Treasurer

Nikhil, a housing society treasurer, received Rs.60 lakh in UPI for maintenance charges, deposited into the society account.

Defense:

VI. Can GST Be Levied on Digital Payments Alone?

The GST law is supply-driven-not payment-driven. This is the golden rule.

Remember:

GST enforcement based solely on UPI inflows is not only poor tax logic but may invite constitutional challenges under Article 14 and Article 19(1)(g).

VII. What Should the Government Do?

While data-driven tax enforcement is the future, it must walk hand-in-hand with fairness.

Recommendations:

Otherwise, such actions risk killing the very spirit of "Digital India."

VIII. Conclusion: Digital ≠ Dubious

As India marches ahead in its cashless economy, it must ensure that law-keeping doesn't become law-breaking. Traders have a strong legal arsenal to defend themselves against ill-reasoned GST notices based on UPI data.

While non-compliance must be addressed, compliance must also be encouraged-not penalized unfairly.

Because at the end of the day, the goal of taxation is revenue, not revenge.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.