Until recently, GoI would have us believe, nothing was more certain than UPI and GST. This was not a bad thing. The former has allowed 300 mn Indians to enjoy the convenience and speed of digital payments, the transaction value of which topped ₹260 tn in FY2025 while the latter has allowed indirect tax payments to exponentially increase, achieving a record ₹22 tn in the same period.
But when the former is used to forcibly induce the latter, it is likely to stir rejection and resistance. Such is the case with the mounting volume of visible and anecdotal evidence in India-most recently observed in Bengaluru-of smaller merchants putting up 'No UPI, Only Cash' signboards. This is not a good sign. Digital payments operate in a two-sided market: users must discover enough merchants that accept this form of payment and merchants must experience material benefit to continue to accept the same. Thanks to the efforts of private operators, UPI user adoption and merchant acceptance grew exponentially. Any residual friction-usually the result of the fear of affordability-was minimised with the elimination of merchant discount rate (MDR).
But while consumers enjoyed the ability to make payments via mobile phones, many small and medium physical merchants (SMPMs) have not seen a material uptick in their businesses on account of UPI-neither higher sales from the same cluster of patrons nor via the addition of new customers. Most accepted UPI because it cost nothing, and because small denomination notes were hard to come by.
So, when the government, especially state governments, began to use UPI transaction data to present small merchants with a consolidated GST bill, merchant outrage was a result of being asked to pay a levy they had never been expected to suffer before, and a lingering suspicion that they had been won over with honest freebies only to be betrayed in taxing consequence.
Things could have been managed differently. As a class, SMPMs are no different from early 20th century Americans. For the longest time, I-T had been deemed unconstitutional. Even after the passage of the 16th Amendment in 1913, when individual and small proprietorship earnings could be officially taxed (corporate tax for larger companies had only been introduced in 1909), less than 1% of the population complied. This continued, without state harassment until, in 1943, another Act allowed employers to withhold tax, making tax collection easy, frictionless and efficient. Another 25 years would elapse before the concept of an alternative minimum tax (AMT) absorbed those still remaining outside the tax net in the US.
As such, current SMPM misgivings are not without merit. Those that were forced to register for GST find that the simplified, but higher, tax rates eat into profits. Moreover, other complexities like technological integration, compliance requirements and working capital challenges linked to paying a one-time monthly bill have made many qualifying merchants-even those with a sense of probity-shy away from exploring the advantages of this simplified tax scheme.
Furthermore, many SMPMs, originally exempted because their annual turnover did not exceed the minimum threshold of ₹40 lakh (₹20 lakh in the northeastern states), are being coerced by officials into paying a tax they cannot comprehend, and whose basis they vociferously deny. To this end, there is probably some truth in the rumour that state governments (especially those not aligned with the Centre) looking to make good on astronomical electoral promises, are trying to extract incremental state GST (SGST) -an intra-state toll within their control-from local merchants, to subsidise these profligate welfare schemes.
And all on account of UPI transaction data. Merchant rejection of UPI is a worrying sign. It comes at a time when user growth is slowing, merchant onboarding is lagging and payment players have little incentive to boost usage. Meanwhile, RBI has mandated that ATMs carry more lower-denomination notes-making cash more accessible.
Much better that GoI rationalises GST rates for SMPMs, possibly creating a low and automatically deducted AMT after reducing GST threshold criteria, to make the levy both near-universal and palatable (a few coppers could be shared with payments ecosystem to sustain UPI momentum). GoI would not, after all, want to declare that either UPI growth or GST coverage was uncertain.
But when the former is used to forcibly induce the latter, it is likely to stir rejection and resistance. Such is the case with the mounting volume of visible and anecdotal evidence in India-most recently observed in Bengaluru-of smaller merchants putting up 'No UPI, Only Cash' signboards. This is not a good sign. Digital payments operate in a two-sided market: users must discover enough merchants that accept this form of payment and merchants must experience material benefit to continue to accept the same. Thanks to the efforts of private operators, UPI user adoption and merchant acceptance grew exponentially. Any residual friction-usually the result of the fear of affordability-was minimised with the elimination of merchant discount rate (MDR).
But while consumers enjoyed the ability to make payments via mobile phones, many small and medium physical merchants (SMPMs) have not seen a material uptick in their businesses on account of UPI-neither higher sales from the same cluster of patrons nor via the addition of new customers. Most accepted UPI because it cost nothing, and because small denomination notes were hard to come by.
So, when the government, especially state governments, began to use UPI transaction data to present small merchants with a consolidated GST bill, merchant outrage was a result of being asked to pay a levy they had never been expected to suffer before, and a lingering suspicion that they had been won over with honest freebies only to be betrayed in taxing consequence.
Things could have been managed differently. As a class, SMPMs are no different from early 20th century Americans. For the longest time, I-T had been deemed unconstitutional. Even after the passage of the 16th Amendment in 1913, when individual and small proprietorship earnings could be officially taxed (corporate tax for larger companies had only been introduced in 1909), less than 1% of the population complied. This continued, without state harassment until, in 1943, another Act allowed employers to withhold tax, making tax collection easy, frictionless and efficient. Another 25 years would elapse before the concept of an alternative minimum tax (AMT) absorbed those still remaining outside the tax net in the US.
As such, current SMPM misgivings are not without merit. Those that were forced to register for GST find that the simplified, but higher, tax rates eat into profits. Moreover, other complexities like technological integration, compliance requirements and working capital challenges linked to paying a one-time monthly bill have made many qualifying merchants-even those with a sense of probity-shy away from exploring the advantages of this simplified tax scheme.
Furthermore, many SMPMs, originally exempted because their annual turnover did not exceed the minimum threshold of ₹40 lakh (₹20 lakh in the northeastern states), are being coerced by officials into paying a tax they cannot comprehend, and whose basis they vociferously deny. To this end, there is probably some truth in the rumour that state governments (especially those not aligned with the Centre) looking to make good on astronomical electoral promises, are trying to extract incremental state GST (SGST) -an intra-state toll within their control-from local merchants, to subsidise these profligate welfare schemes.
And all on account of UPI transaction data. Merchant rejection of UPI is a worrying sign. It comes at a time when user growth is slowing, merchant onboarding is lagging and payment players have little incentive to boost usage. Meanwhile, RBI has mandated that ATMs carry more lower-denomination notes-making cash more accessible.
Much better that GoI rationalises GST rates for SMPMs, possibly creating a low and automatically deducted AMT after reducing GST threshold criteria, to make the levy both near-universal and palatable (a few coppers could be shared with payments ecosystem to sustain UPI momentum). GoI would not, after all, want to declare that either UPI growth or GST coverage was uncertain.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
Ateesh Tankha
The writer is founder-CEO, ALSOWISE Content Solutions