What we have understood about startups up till now is that, when a person or a group of people have a unique business plan in mind, that is feasible enough and has the potential to pay off, they turn their idea into reality by way of startups. It is a well-researched, well-planned business that these people undertake. The popularity of such ventures has lately increased since the support of the government has been on the rise.
The Indian government has launched various startup schemes to support such people. Moreover, numerous tax benefits are provided to such entities; it has become more accessible for people to fulfil their dreams. The compliances under other laws are also simple, and the registration of such entities is also not very troublesome.
A lot of such startups have flared well and was received warmly by the public, which has turned them into leaders in their sectors. A lot of exemptions and reliefs are provided to the entities each year.
However, people have now started using the provisions for fulfilment of their wrong intentions. People now mould and use these benefits to their advantage. In short, it has turned out to be one of the ways in which money laundering is done. The black money kept outside the country is brought back into the country utilising such businesses and hence gets converted to white cash.
How do such startups work?
First, the company is incorporated as a private limited entity and also an overseas subsidiary is registered. After the legal structure is in place, the process of bringing the black money parked abroad begins. Once the money laundering is complete, the company is run for a few years. Followed by a declaration of bankrupt it is closed, and hence the motive with which it was formed is achieved.
There are many nations outside India like Mauritius where the companies exist only on paper, and addresses of most of these start with a mere post box number were found. This is just an instance, Mauritius and other tax haven act as shields to bring back India’s black money as white. Indians continue to send illicit funds abroad as well.
This is done through numerous methods, like hawala transactions — where the money is transferred abroad without any real transfer of funds — is one of them although. According to a finance ministry white paper on black money released a few years ago, hawala transactions have decreased over the past decade.
Over the past few years, the Indian government has been continuously involved with startups to find a midway for angel tax reviews and black money laundering. After much consultation, the government spared startups from Section 56 (2) (viib) of the Income Tax Act recently. Nevertheless, the focus has now stirred towards investors.
The Enforcement Directorate (ED) early this year has started investigating Indian investors about downstream investments made by foreign companies where they hold an equity stake. The ED has reportedly solicited details of investments in international companies, many of which are located in tax havens.
The officials have asked for details of investments made by the companies during 2018-19. The ED raised concerns regarding the elimination of the investments by these foreign companies in the income tax filings of the Indian beneficiaries.
As per the reports, investors/ individuals who received the notice from ED agreed that they have small investments in foreign companies, but have no control or any information about where they invest.
The ED also investigated whether any commission or other income of an individual has gone to this investment company.
The notable thing is that it is not the first time that such notice has been issued. Under provisions of the legislation that puts curbs on black money, these investors were questioned before as well. In most of the cases, details about the investment companies and other data were submitted before the revenue department.
Furthermore, the Indian startup ecosystem is reeling from the exposé from the International Consortium of Investigative Journalists (ICIJ), which showed that Sequoia Capital —one of the most active investors in the Indian startup ecosystem. It has reduced its tax burden in the country by setting up shell companies in Mauritius, and other such taxes havens.
This is a serious issue that needs government attention. Some strict regulations need to be enacted to put a stop to such activities.