Storm Over Startups: Financial Frauds, Tax Notices, and a Sector Under Scrutiny

Once hailed as the engine of India’s economic ambition, the startup ecosystem is now facing uncomfortable questions. At the heart of this brewing storm lies a series of alleged financial irregularities involving prominent startups and a tightening grip by the Income Tax Department on where the money is really coming from.

Over the past few months, names like Gensol and Medikabazaar—once symbols of entrepreneurial innovation—have become cautionary tales, entangled in controversies over fund diversion and questionable corporate conduct. But while these high-profile cases dominate headlines, they also point to a deeper malaise: the growing concern over how startup capital is being sourced, used, and disclosed.

The Taxman Cometh

According to a media reports, India’s Income Tax Department is actively tightening the screws—not just on startups, but also on the investors and promoters who back them. Fresh notices are being issued demanding detailed disclosures: income tax returns from the three years prior to the investment, bank account statements, and income proofs.

At the center of this scrutiny are startups that are not recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). Authorities suspect that in many such cases, investments might be serving as facades to launder money or obscure the real sources of funds—especially when these funds are funneled through tax havens or appear to be "round-tripped" through shell companies.

This crackdown is legally backed by Section 68 of the Income Tax Act, which empowers tax authorities to question any unexplained credits in a taxpayer's financial records. The law is being wielded to uncover whether certain investments are genuine or simply a smokescreen.

In a similar move just last month, about 300 private equity firms and startup promoters received notices related to capital gains tax. Clearly, the net is widening—and fast.

Startups Under Fire

While the broader ecosystem reels under the heat, some startups have already found themselves in the eye of the storm.

Take Gensol, for instance—the electric mobility player linked with ride-hailing platform BluSmart. The company's promoters, Anmol and Puneet Jaagi, are now under a cloud for allegedly diverting funds and forging disclosures related to their financial dealings. What once looked like a clean energy success story has now turned into a case study of financial mismanagement.

Another striking example is Medikabazaar, a B2B health-tech company once considered a vital cog in India’s medical supply chain. In a sudden shake-up, its board removed cofounder and CEO Vivek Tiwari, citing “malicious and fraudulent activities.” In his defense, Tiwari has claimed that his ousting was an “orchestrated attempt by investors to unlawfully remove him” from both his executive role and promoter position.

Such cases not only dent investor confidence but also raise uncomfortable questions about the governance frameworks within some of India’s most celebrated startups.

The Bigger Picture: A Crisis of Trust?

India’s startup ecosystem has grown by leaps and bounds over the past decade—fueled by a booming digital economy, a rising middle class, and an enthusiastic investor base. But this rapid growth may have also left some dark corners unexamined.

Startups, by nature, are high-risk ventures. Their early-stage capital often flows through a labyrinth of angel funds, family offices, and foreign investments. In the absence of robust due diligence or regulatory clarity, this can easily create loopholes for malpractices—intentional or otherwise.

What makes matters trickier is that not all startups operate under the DPIIT umbrella. While DPIIT recognition offers certain tax benefits and acts as a certification of credibility, many startups continue to operate outside this framework, leaving room for questionable financial activities to go unchecked.

The recent wave of tax scrutiny may just be the beginning. It signals a shift in the regulatory landscape—where transparency, accountability, and compliance are no longer optional, but essential for survival.

For genuine entrepreneurs, this could turn out to be a moment of cleansing—a much-needed push to tighten governance structures and maintain clean books. But for those who have taken liberties with investor trust and financial norms, the road ahead could get much bumpier.

At a time when India is aspiring to become a global startup hub, the ecosystem’s credibility cannot be compromised. Startups are more than just businesses—they are narratives of ambition, innovation, and hope. To protect that spirit, transparency must go hand in hand with growth.