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Indian startups under I-T department scanner; gets tax notices over VC funding

IndianStartupNews

IndianStartupNews · 1y ago

Indian startups under I-T department scanner; gets tax notices over VC funding

Indian startups, particularly in the fintech sector, have been receiving tax notices from the Income Tax Department. These notices question the nature and source of the venture capital funding received by startups and lead to significant tax and penalty demands. Startups are struggling to comply with the demands for extensive documentation and face challenges in proving the legitimacy of their funding sources. Appeals against these tax demands require paying 20% of the total tax bill. These tax notices have raised concerns among startups and investors, but the startup ecosystem continues to show resilience and optimism.

Related News

Startups Under I-T Dept Scanner, Get Tax Notices Over VC Funding

Inc42 · 1y ago

Startups Under I-T Dept Scanner, Get Tax Notices Over VC Funding

Several Indian startups, particularly in the fintech sector, have received tax notices from the Income Tax Department. The notices combine investments received with earned income, resulting in tax and penalties. Under Section 68 of the Income Tax Act, if a company fails to explain the origin and nature of its funding, the tax authorities may tax both capital and income. Startups affected by these demands must deposit 20% of the total tax demand to appeal, which may strain working capital needs. This comes as funding in the Indian startup ecosystem shows signs of picking up, with a 43% increase in funding raised in February compared to the previous month.

I-T dept flags financial reporting error after sending advance tax notices; asks tax-payers to wait for updates

Money Control

Money Control · 1y ago

I-T dept flags financial reporting error after sending advance tax notices; asks tax-payers to wait for updates

Taxpayers who received advance tax payment notices from the income tax (I-T) department can breathe a sigh of relief for now, according to tax experts. The I-T department recently identified errors in the financial transaction data reported by taxpayers for the 2023-24 financial year. As a result, some taxpayers received notices for higher advance tax payments than expected. The department has advised these taxpayers to await further updates on their annual information statements and take no immediate action. The errors were attributed to inconsistencies in securities market data reported by an unnamed entity.

Domestic startups come under income tax glare for their recent funding

Economic Times

Economic Times · 1y ago

Domestic startups come under income tax glare for their recent funding

Several new economy ventures in the fintech sector have received income tax notices under Section 68 of the Income Tax Act. These notices have combined the investments received by startups with their income, leading to tax and penalty levies. In one case, a startup has been asked to pay Rs 37 crore in tax and penalty on funding of Rs 40 crore. Startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) typically do not face such scrutiny. Venture funds and AIFs have also received tax notices, causing concerns about the impact on working capital. The government had amended Section 68 of the IT Act in 2022 to seek information about the sources of venture fund infusion.

Have o data on the number of startups impacted by angel tax: I-T Department

Inc42 · 1y ago

Have o data on the number of startups impacted by angel tax: I-T Department

The Income Tax Department in India has responded to a Right to Information (RTI) request stating that it has no data regarding the number of startups affected by the angel tax and Section 68 of the Income Tax Act. These provisions have caused significant challenges for startups, leading to closures and legal battles. The department does not maintain data on startups separately, and thus, regional branches had no information regarding notices issued under these provisions. The lack of a specific category for DPIIT-recognized startups further hinders data availability.

PB Fintech subsidiary Paisabazaar under IT scanner over vendor payments

YourStory

YourStory · 7m ago

PB Fintech subsidiary Paisabazaar under IT scanner over vendor payments

PB Fintech Limited's subsidiary, Paisabazaar, has received notices from the Income Tax Department regarding certain vendor payments. The notices seek explanations on transactions and services provided by vendors and related entities. Paisabazaar has committed to providing responses within the given timeline. The financial impact of these notices is currently uncertain. In addition, the company had previously received a notice from SEBI regarding a potential violation of insider trading rules. The company stated that this notice does not affect its finances or operations and is seeking legal advice for an appropriate response. There has also been a reorganization of the company's board committees, with changes in the audit committee.

Startup backers told to share investment information

Economic Times

Economic Times · 2m ago

Startup backers told to share investment information

The income tax department has issued notices to startup funders and promoters, requesting investment details and tax returns for three prior years, particularly for non-DPIIT-recognized startups or suspected fund "round-tripping" cases. This action, under Section 68 of the Income Tax Act, seeks clarification on unexplained income sources. Concerns arise over treating share issue amounts as income and privacy of personal tax records. However, DPIIT-recognized startups remain exempt from such scrutiny, with the focus primarily on investments from tax havens.

Income Tax dept seeking shareholders’ details from some startups: Ashneer Grover

Economic Times

Economic Times · 1y ago

Income Tax dept seeking shareholders’ details from some startups: Ashneer Grover

The Income Tax department has issued notices to several startups, requesting details about their shareholders and three-year income tax returns (ITRs) of their shareholders. BharatPe's co-founder, Ashneer Grover, highlighted this issue on social media. The department invoked Section 142 (1) of the Income Tax Act, placing the initial onus on the startups to prove the identity, creditworthiness, and genuineness of transactions related to share capital/premium accounts. The department aims to determine the source of investment and its alignment with investors' ITRs.

Budget 2024: Zerodha’s Nithin Kamath seeks tax exemptions for startup investors

Economic Times

Economic Times · 1y ago

Budget 2024: Zerodha’s Nithin Kamath seeks tax exemptions for startup investors

Zerodha CEO Nithin Kamath has urged the Indian government to provide tax exemptions for investments in startups, as a way to tackle unemployment. Kamath believes that encouraging entrepreneurship is crucial for addressing structural unemployment in the country. He specifically called for including investments in startups within the existing tax exemption under Section 54F of the Income Tax Act. Kamath acknowledged potential risks but emphasized the significant positive impact it could have. The Department for Promotion of Industry and Internal Trade (DPIIT) has previously recommended removing the angel tax on startups to boost funding.

Govt granted income tax benefits to 2,975 recognised startups so far

Inc42 · 1y ago

Govt granted income tax benefits to 2,975 recognised startups so far

The Indian government has granted income tax exemptions to a total of 2,975 startups that have been recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) so far. This initiative falls under the Startup India program, aiming to encourage and support the growth of Indian startups. The government is also working on formulating a standard operating procedure (SOP) to fast-track applications for eligibility certificates to claim tax benefits. The government has also granted 1,800 intellectual property rights to startups and introduced various funding schemes to support their growth.

Startups Vs Income Tax Department: A Battle That Seems To Have No End

Inc42 · 1y ago

Startups Vs Income Tax Department: A Battle That Seems To Have No End

Startups and investors in India are expressing frustration over recent notices from the Income Tax Department. Some startups have been asked to submit their investors' income tax returns for the past three years. While the department has provided an explanation, many in the startup community find it misleading. They argue that this request is unreasonable and that the department should retrieve such information directly from investors using their Permanent Account Numbers (PANs). This issue is reigniting concerns about the taxation of startups in India, with some feeling that the government's promises to ease such burdens have not been fully realized.

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