The Central Board of Direct Taxes (CBDT) has emphasized that startups that have been recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) and have filed the necessary declarations will not undergo examination for foreign investments under Section 68 of the Income-tax Act, 1961.

Section 68 applies to unexplained credits in a taxpayer’s books. The CBDT’s clarification comes after businesses received income-tax warnings for overseas funding routed through Singapore.

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“Recognised startups that meet the standards outlined in DPIIT’s Notification No. G.S.R. 127(E) dated February 19, 2019, and file a statement in Form-2 are entitled for various tax exemptions and deductions under the Income-tax Act of 1961.  Investments in such firms are eligible for advantages and are not subject to inspection,” the CBDT wrote on X (previously Twitter) in response to tax lawyer Ajay Rotti’s post.

However, the tax department stated that investments in companies that do not satisfy the required parameters may be reviewed in accordance with the department’s risk management policy.

Industry experts had previously warned that excessive use of Section 68 could discourage legitimate foreign investors and increase litigation, particularly in cases involving older deals.

This clarification intends to provide aid to compliant companies while also ensuring that legitimate foreign investments are not hampered by unnecessary tax scrutiny.