The benefits of formalization under the GST may be jeopardized by aggressive tax enforcement that targets small businesses, according to a warning from an SBI report. The bank warned that such actions run the risk of forcing unorganized players back into the cash economy in a research note.

Key Highlights

• SBI warns that applying GST on UPI transactions may drive small businesses toward cash payments.
• Tax scrutiny on digital payments could discourage UPI adoption among India’s micro and small enterprises.

"A recent case from Karnataka illustrates this tension, where numerous small traders and shopkeepers in Bengaluru have received disproportionately high tax notices primarily based on digital footprints such as UPI transactions," said the report.

"While the intention to capture a more accurate picture of economic activity and reduce tax evasion is commendable, such enforcement must be balanced with sensitivity," the report said, urging moderation.

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The very goal of formalization could be undermined if small businesses are forced back into the unofficial cash-based economy by excessively stringent scrutiny. SBI contends that a key component of GST's future must continue to be inclusivity.

"GST has laid the foundation for greater accountability and revenue generation, but its long-term success will depend on ensuring that it empowers all stakeholders, especially small traders, instead of penalising them."