TLDR: Domestic Startups Under Income Tax Scrutiny
Key Points:
- Several fintech startups have received income tax notices under Section 68 of the Income Tax Act.
- Startups have been asked to pay taxes and penalties on combined funding and income amounts.
The recent scrutiny from the Income Tax Department has put domestic startups, primarily in the fintech sector, under the spotlight for their recent funding activities. Notices have been sent to multiple startups under Section 68 of the Income Tax Act, combining their investments with their income and demanding taxes and penalties accordingly. Some startups have been asked to pay significant amounts in taxes, with one startup facing a demand of Rs 37 crore on a funding of Rs 40 crore.
Under Sec 68 of the I-T Act, startups need to satisfactorily explain the nature and source of their funding to avoid tax implications. However, the stringent scrutiny has even targeted startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT), which typically do not face such issues. One founder mentioned receiving a notice requesting balance sheets of investors, even after submitting all necessary documents.
Tax lawyers have pointed out that even Alternative Investment Funds (AIFs) have received notices, creating challenges for startups to justify their investments and income separately. The government’s amendment to Section 68 of the IT Act in 2022 has given the department more authority to seek information on venture fund sources, leading to increased scrutiny on startups and investors alike.
Overall, the taxation challenges faced by startups in India highlight the need for a balance between tax compliance and fostering an environment conducive to entrepreneurship. With the government’s focus on curbing illegitimate transactions, startups and investors are navigating through complex tax regulations to ensure compliance and growth.
