Start-ups face I-T department probe for misusing tax breaks
What's the story
India's Income Tax Department is investigating several start-ups over alleged misuse of tax exemptions. The companies are accused of claiming benefits without any real business activity. The investigation was launched after the department noticed a pattern of suspicious claims under Section 80-IAC. It is a provision meant to encourage entrepreneurship by providing tax holidays to eligible start-ups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).
Shell companies
How was the misuse done?
The investigation has uncovered a number of start-ups that appear to have been set up mainly for the purpose of availing tax exemptions. These companies allegedly secured DPIIT recognition, a key requirement for claiming the tax holiday, despite having little or no business activity. The trend has raised concerns within the tax department, prompting officials to assess its scale and potential revenue impact.
Regulatory measures
Government may tighten start-up approval, verification processes
The findings of the investigation have been escalated by the Central Board of Direct Taxes (CBDT) to the DPIIT. In light of these developments, discussions are underway within the government to tighten start-up approval and verification processes. Proposed measures include stricter due diligence during registration, enhanced post-recognition monitoring, and inter-departmental data-sharing.
Recovery proceedings
What is Section 80-IAC?
If misuse is confirmed, authorities may consider revoking exemptions and initiating recovery proceedings. The Section 80-IAC of the Income Tax Act allows a 100% deduction on profits for any three consecutive years within the first decade of incorporation, subject to certain conditions like turnover limits and nature of business. The provision was brought to support early-stage ventures and foster innovation but has been exploited by some entities without genuine business activity.