reports surfaced that Indian banks, in consultation with the Department of Financial Services (DFS), the Reserve Bank of India (RBI), and the National Payments Corporation of India (NPCI), have recommended raising the Goods and Services Tax (GST) registration threshold from Rs 40 lakh to Rs 1 crore for merchants. This proposal, detailed in sources like Moneycontrol and echoed in posts on X, aims to curb a growing trend of merchants abandoning digital payments, particularly Unified Payments Interface (UPI) transactions, in favor of cash to evade GST compliance. The move comes in response to actions by the Karnataka Commercial Tax Department, which issued notices to merchants with turnovers above Rs 40 lakh, prompting many to revert to cash transactions.
This recommendation reflects a broader effort to balance India’s push for a digital economy with the need to reduce compliance burdens on small businesses. However, it also raises questions about revenue implications, enforcement challenges, and the potential impact on the digital payment ecosystem. This article explores the context of the proposal, its drivers, potential outcomes, and the critical implications for India’s economic landscape as of August 12, 2025.
The Context: Merchants Ditching Digital Payments
India’s digital payment ecosystem, particularly UPI, has seen explosive growth, with an estimated 35 crore merchant UPI QR codes facilitating 64% of nearly 20 billion transactions at merchant establishments, as reported by Moneycontrol. UPI’s affordability and ease have made it the preferred payment method in urban and rural areas alike, supporting India’s ambition to formalize its economy. However, recent enforcement actions by the Karnataka Commercial Tax Department have disrupted this progress. Notices sent to merchants with annual turnovers above Rs 40 lakh for goods or Rs 20 lakh for services—thresholds requiring GST registration—have led many to abandon digital payments to avoid tax scrutiny.
The notices, based on UPI transaction data from 2021-22 to 2024-25, aim to curb tax evasion but have backfired, pushing merchants toward cash transactions. This trend, highlighted in Tamil Oneindia, threatens to undo years of progress in digital adoption. A senior banker quoted by Moneycontrol warned, “You do not want this issue to force merchants away from digital payments. All the efforts over the last five years will be wasted.” In Bengaluru, a hub for UPI usage, 90% of small and micro shops have reportedly stopped accepting UPI, with signs declaring “No UPI” becoming common, as per Tamil Oneindia.
The Proposal: Raising the GST Slab to Rs 1 Crore
To address this, banks have proposed increasing the GST registration threshold to Rs 1 crore for both goods and services, effectively exempting smaller merchants from mandatory registration and filing. Currently, merchants with turnovers above Rs 40 lakh for goods or Rs 20 lakh for services must register on the GST portal and file annual returns, even if they owe no taxes. This compliance, described as a “burden” by a senior finance ministry official in Moneycontrol, discourages small businesses, particularly those with low profit margins of 5-10%, translating to annual incomes below Rs 10 lakh—exempt from income tax under the new regime.
Banks argue that aligning the GST threshold with this income tax exemption would reduce compliance pressures, encouraging merchants to continue using digital payments. They also recommend applying the Merchant Discount Rate (MDR)—a commission charged by payment companies—only to merchants with turnovers above Rs 1 crore, further incentivizing digital transactions. The DFS sought feedback from banks, RBI, and NPCI on this proposal, as well as data on merchants with turnovers above Rs 20 lakh, to assess its feasibility, as per TradingView.
Drivers of the Recommendation
Several factors underpin the banks’ proposal:
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Karnataka’s Tax Enforcement Backlash: The Karnataka tax notices, based on digital transaction data, have inadvertently driven merchants to cash, undermining India’s digital economy goals. SBI’s research report, cited in Tamil Oneindia, warns that strict GST enforcement could push small businesses back to a cash-based economy, negating UPI’s progress.
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Compliance Burden on Small Businesses: Registering for GST, even without tax liability, involves administrative costs and complexity. A finance ministry official noted, “The idea would be to reduce the compliance burden for small businesses,” aligning with broader efforts to simplify tax structures, as per Moneycontrol.
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Protecting UPI’s Growth: UPI’s dominance, with 64% of transactions at merchant outlets, is critical to India’s financial inclusion strategy. Banks fear that continued enforcement could erode trust in digital platforms, as evidenced by Bengaluru’s “No UPI” trend.
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MDR Implementation Concerns: The potential introduction of MDR on UPI transactions for larger merchants has raised fears of further digital payment avoidance. Banks suggest limiting MDR to high-turnover merchants to mitigate this risk.
Potential Implications: Opportunities and Risks
The proposed Rs 1 crore GST slab offers several potential benefits:
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Boost to Digital Payments: By reducing compliance for small merchants, the proposal could restore confidence in UPI, preserving India’s digital payment ecosystem. X posts like @capraveensh’s highlight the goal of reducing the cash economy and boosting tax compliance.
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Support for Small Businesses: Exempting merchants with turnovers below Rs 1 crore aligns with the income tax exemption for incomes below Rs 10 lakh, easing financial pressures on small retailers, as argued by a banker in Moneycontrol.
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Economic Formalization: Encouraging digital transactions without punitive tax measures could bring more businesses into the formal economy over time, enhancing transparency.
However, risks abound:
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Revenue Loss: Raising the GST threshold could reduce the number of registered businesses, potentially impacting GST collections, which exceeded Rs 20 lakh crore in 2023-24, as per Times of India. The GST Council, which oversees such decisions, must weigh this against revenue neutrality.
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Enforcement Challenges: A higher threshold might encourage tax evasion among larger merchants misreporting turnovers, requiring robust monitoring systems. Tamil Oneindia notes that tax authorities already use digital transaction data to track revenue, suggesting enforcement will persist.
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Political Sensitivity: As a senior banker told Moneycontrol, GST changes are “largely political issues.” The proposal requires GST Council approval, involving state and central finance ministers, which could face resistance from states reliant on GST revenue.
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MDR Backlash: Introducing MDR for merchants above Rs 1 crore could still deter digital adoption among mid-sized businesses, as warned by SBI’s research report.
Critical Perspective: Balancing Digital Growth and Fiscal Responsibility
The banks’ recommendation reflects a pragmatic response to a real issue: overly aggressive tax enforcement risks undermining India’s digital payment revolution. The Karnataka notices, while aimed at curbing evasion, have highlighted the unintended consequences of using digital transaction data against merchants. The Rs 1 crore slab proposal aligns with broader GST reforms, such as the planned elimination of the 12% slab to simplify the tax structure, as reported by CNBC-TV18. However, it raises critical questions about fiscal sustainability and enforcement.
The GST Council’s consideration of exemptions for small traders, as noted in Tamil Oneindia, suggests a willingness to adapt, but the revenue implications cannot be ignored. India’s GST collections are a cornerstone of its fiscal framework, and any reduction in registered businesses could strain budgets, especially with populist schemes like Ladli Behna Yojana requiring significant funding, as per Times of India. Moreover, the reliance on digital data for tax enforcement, while effective, risks alienating merchants if not balanced with incentives like the proposed slab increase.
The proposal also intersects with India’s digital economy ambitions. UPI’s success, with 35 crore QR codes, is a global model, but its sustainability depends on trust. The “No UPI” trend in Bengaluru underscores the fragility of this trust, as merchants prioritize avoiding tax scrutiny over convenience. The banks’ suggestion to limit MDR to high-turnover merchants is a step toward compromise, but its implementation must be carefully calibrated to avoid further pushback.
Broader Context: GST Reforms and Digital India
The Rs 1 crore slab proposal is part of a larger GST reform narrative. The GST Council, set to meet in June 2025, is considering streamlining the four-rate structure (5%, 12%, 18%, 28%) into a three-tier system, potentially eliminating the 12% slab, as per CNBC-TV18. This aligns with the banks’ push for simplification, reducing compliance burdens for small businesses. Additionally, the government’s April 1, 2025, GST updates, including mandatory multi-factor authentication and biometric verification, aim to enhance security but add complexity for merchants, as reported by NDTV.
India’s digital payment ecosystem is at a crossroads. The NPCI’s April 2025 directives to deactivate inactive UPI-linked mobile numbers, cited in NDTV, aim to secure transactions but could disrupt small merchants’ operations. The Rs 1 crore slab could counterbalance these pressures, reinforcing UPI’s role in financial inclusion.
A Delicate Balance for India’s Economic Future
The recommendation to raise the GST registration threshold to Rs 1 crore represents a strategic effort to sustain India’s digital payment revolution while easing the burden on small merchants. Driven by the backlash against Karnataka’s tax notices and the broader push for GST simplification, the proposal has the potential to restore trust in UPI and support small businesses. However, it must navigate fiscal risks, enforcement challenges, and political hurdles within the GST Council.
As India celebrates its digital economy’s growth, the banks’ proposal underscores the need for policies that balance compliance with incentives. Whether the Rs 1 crore slab becomes reality depends on the GST Council’s deliberations, but its intent—to keep merchants in the digital fold—is a step toward a more inclusive economy. As X post @auditors_world noted, “The GST slab in India may be increased to Rs 1 crore to curb merchants ditching digital payments,” capturing the hope that this reform could preserve India’s digital momentum without sacrificing fiscal stability.
