GST enforcement should be balanced with sensitivity: SBI Research amid Karnataka UPI-GST row

New Delhi: GST enforcement should be balanced with sensitivity as aggressive scrutiny based on UPI transactions may drive small businesses back into the informal cash-based economy, SBI Research said on Tuesday amid reports that small merchants in Karnataka were preferring cash transactions due to GST notices.

Cautioning on the emerging challenges in GST, the SBI Research report said that while the indirect tax regime has laid the foundation for greater accountability and revenue generation, its long-term success will depend on ensuring empowerment of small traders, instead of penalising them.

Currently, there are over 1.52 crore active Goods and Services Tax (GST) registrations.

The report highlights several key takeaways, including rising women participation (1 in 5 is a woman taxpayer); top 5 states accounting for about 50 per cent of total GST taxpayers, and GST implementation helping in soothing inflation.

The SBI Research report cited a recent case from Karnataka, where numerous small traders and shopkeepers in Bengaluru received disproportionately high tax notices primarily based on digital footprints, such as UPI transactions.

It is pertinent to mention that amid the Karnataka UPI-GST row, small traders in the state are reportedly planning a three-day protest beginning July 23.

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

"The risk is that overly aggressive scrutiny could drive small businesses back into the informal cash-based economy, undermining the very purpose of formalisation," the SBI Research report said.

Inclusivity, transparency, and fair implementation will be key to celebrating GST in both letter and spirit, said the report, which coincides with the octennial anniversary of GST. On July 1, 2025, the Goods and Services Tax (GST) completed eight years since its rollout.

The report said the input tax credit (ITC) mechanism in GST has removed market distortions and hence, has a soothing impact on inflation.

On women's participation, it said one-fifth of registered taxpayers had at least one female member and 14 per cent of registered taxpayers had all female members.

"This data, along with 15 per cent share of women in overall income taxpayers and 40 per cent in overall deposits, mirrors women empowerment...The encouraging trends further get a thumping seal from substantial high numbers in Limited Liability Partnership (LLP) and Private Limited Companies, the vectors of increased formalisation and momentum in corporate playbook," it said.

SBI Research report said there is a vast untapped potential in GST in certain states.

Some of the larger and richer states like Telangana, Tamil Nadu, Kerala, Andhra Pradesh and Karnataka have a low share in active GST taxpayers compared to the state's share in overall GSDP.

Interestingly, states like Uttar Pradesh, Bihar and Gujarat share in the total GST taxpayers is larger than the state's share in overall GSDP.