Income Tax Department‘s Section 68 Notices Pose Challenges Amidst Surge in Startup Funding
Several startups, particularly those in the fintech sector, have reportedly been served tax notices by the Income Tax Department in recent weeks regarding their venture capital funding.
Under Section 68 of the Income Tax Act, these notices combine the investments received by startups with their earned income, resulting in tax and penalties imposed on the total amount, as reported by ET.
One startup registered with the Department for Promotion of Industry and Internal Trade (DPIIT) has been instructed to settle a tax and penalty amounting to INR 37 Cr based on venture capital funding totaling INR 40 Cr.
According to Section 68, if a company fails to adequately explain the origin and nature of its funding, tax authorities have the power to tax the capital raised in addition to the income earned. This can be resolved if the company provides a satisfactory explanation and submits the necessary documentation.
A fintech startup founder received a notice demanding the submission of balance sheets of investors who injected capital during FY 2023, despite having provided relevant documents and PAN cards of investors.
If startups choose to appeal, they must deposit 20% of the total tax demand initially, affecting cash reserves and working capital needs.
A CBDT spokesperson stated, “Assessment is conducted in a faceless manner in scrutiny proceedings with dynamic jurisdiction. Therefore, it is not possible to comment on specific startups targeted by tax notices.”
Tax notices have also been issued to Alternate Investment Funds (AIFs) regarding transactions conducted in past financial years.
This development occurs amid increased funding activity in the Indian startup ecosystem, with funding rising 43% MoM to $734 Mn in February, alongside a rise in funding deals from 68 to 83 compared to January.
