I-T Department Tightens Noose Around Startups Over Potential Round-Tripping

As financial fraud allegations continue to surface in the Indian startup ecosystem, with companies like Gensol and Medikabazaar under the lens, the Income Tax Department has reportedly stepped up its vigilance over investors and promoters.

An ET report said that notices have been sent to startup investors and promoters, seeking details on certain investments, including tax returns for the three years before the investment, bank account details and proof of income.

These notices target mainly startups that are not recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) or instances where the department suspects the investment might be masking the real source of funds.

This forms a part of a broader crackdown on unexplained or potentially suspicious investments, especially those that may involve “round-tripping” of funds or funds originating from tax havens.

Last month, the department sent similar notices to about 300 private equity firms and promoters over capital gains tax issues.

The legal basis for these notices is Section 68 of the Income Tax Act, which allows tax authorities to scrutinise any unexplained credits in a taxpayer’s books.

The development comes at a time when the Indian startup ecosystem is reeling under the mounting allegations of financial misconduct, including high-profile cases like Gensol and Medikabazaar, among others.

BluSmart-linked Gensol saw its promoters Anmol and Puneet Jaagi, conducting embezzlement in the form of fund diversion and forged disclosure with the securities. 

In another instance,  Medikabazaar ousted its former CEO and cofounder, Vivek Tiwari, from its board, citing “malicious and fraudulent activities”. However, Tiwari sought urgent interim protection against what he termed as an “orchestrated attempt by investors to unlawfully oust him” from his role and promoter status.