In a significant move that could impact India's thriving startup ecosystem, the Income Tax Department has issued show cause notices to multiple startups regarding foreign investments routed through Singapore over the past five years. The tax authorities are seeking detailed explanations about the source, identity, and creditworthiness of overseas investors-particularly Non-Resident Indians (NRIs)-who have backed these companies.
A senior official confirmed that, "Notices have been sent to several startups to justify their foreign fundings in the last five years," adding that the department is closely examining unexplained credits in the books of taxpayers. The focus of the probe is on startups operating in key tech hubs such as Bengaluru, Mumbai, Pune, Hyderabad, and the National Capital Region (NCR).
Bilateral Tax Treaties Fuel the Scrutiny
India has reportedly received extensive financial data from Singapore under bilateral tax treaties and the Automatic Exchange of Information (AEOI) framework. This data has enabled the IT department to trace the flow of funds and initiate scrutiny of high-value transactions, especially those involving foreign bank accounts held by NRIs.
Startups have been formally asked to provide documentation proving the legitimacy of their foreign fund inflows, including investor credentials, fund trail, and justification of the investment. Some companies fear this move may lead to a chilling effect on foreign direct investment, especially from High Net-Worth Individuals (HNIs) and angel investors operating through offshore entities.
Mauritius-Based FPIs Also Under Lens
In a related development, the tax department has also launched a review of tax benefits claimed by Mauritius-based Foreign Portfolio Investors (FPIs) under the India-Mauritius tax treaty. Notices have been served to a few such entities seeking their Tax Residency Certificates (TRC) to determine the authenticity of their residency claims and ensure that tax benefits are not being misused.
Startup Ecosystem Reacts With Concern
While the move is aimed at curbing illicit fund flows and round-tripping, many in the startup ecosystem have expressed alarm. The issuance of tax notices has triggered fears of "tax terrorism" and regulatory overreach. Founders and venture capitalists worry that such measures might discourage legitimate international funding at a time when India is positioning itself as a global startup hub.
The government, however, maintains that this is part of a larger effort to ensure transparency and compliance in financial transactions involving foreign funds.
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