Your Digital Activities: A Tax Weapon?

India’s shift towards digital transactions and online ecosystems has brought convenience, transparency, and efficiency. But alongside these benefits, it has also given tax authorities unprecedented tools to scrutinize citizens’ financial lives.

In Karnataka, a small vegetable vendor recently received a staggering ₹29 lakh GST notice. The basis: his UPI inflows of ₹1.63 crore over four years, despite the fact that he had regularly reported his income through ITR filings.

By law, fresh and unprocessed vegetables are GST-exempt, and small vendors in this line typically don’t even require GST registration. However, with the rise of digital payments, authorities are increasingly tracking cumulative UPI volumes—treating them as taxable turnover irrespective of exemptions.

Worse still, the burden of proof rests on small vendors—who must now demonstrate that all receipts were for exempt goods. For individuals with no professional accounting support, this is nearly impossible, pushing them into a cycle of compliance costs and fear.

This case didn’t remain an isolated incident. Across Karnataka, street vendors and shopkeepers expressed concern—and anger—over similar notices related to UPI transactions. The fallout has been immediate and severe. Many vendors and shopkeepers across the nation, fearful of similar notices, are now rejecting UPI payments and reverting to cash. Trade bodies have condemned the move as unfair and regressive, arguing that it punishes compliance rather than encouraging it.

Alongside enforcement through UPI trails, The proposed Income-Tax Bill, 2025 takes things a step further. It seeks to extend search-and-seizure powers to include access to an individual’s “virtual digital space.” Currently, under Section 132 of the Income-Tax Act, 1961, authorities may search physical spaces like homes and offices. When enacted, the amendment would allow them to probe emails, cloud storage, social media accounts, and even encrypted apps.

The intent, on paper, is modernization—acknowledging that financial records and illicit activities often reside in digital rather than physical domains. But the risks are troubling. Digital spaces hold far more than tax-relevant data—they reveal personal and confidential data as well! This proposal has therefore sparked serious concerns about overreach and surveillance, raising questions about how India will balance enforcement with constitutional guarantees of privacy.

Together, these two cases highlight how digital footprints—whether through UPI payments or online activities—are turning into a double-edged sword.

India’s digital transformation has been designed to empower citizens and simplify compliance. To preserve that vision, enforcement must be balanced with proportionality, clarity, and judicial oversight. Without this, digital presence risks turning into a tool of fear—driving people back toward cash and offline systems instead of embracing a transparent, digital future.