Indian startups moving their domicile back to India will have to pay taxes, the Minister of Commerce Piyush Goyal told the Economic Times. “These companies went outside for their own selfishness…not because of any pressure or other reason. They wanted to do better tax planning…they enjoyed that benefit. Why they want to come back is not an altruistic motive,” he explained. This comes after multiple Indian startups, like Razorpay, Pine Labs and Meesho, that had been domiciled abroad decided to move back to India. One of the most notable startups to do so is PhonePe, whose parent company Walmart has paid nearly $1 billion in tax to the Indian government for shifting the startup’s headquarters from Singapore to India.
Why it matters?
These startups had previously undergone flipping which is the process of transferring the entire ownership of an Indian company to an overseas entity, accompanied by a transfer of all IP and all data hitherto owned by the Indian company. This essentially converts the Indian startup into a subsidiary of a foreign business. Flipping was flagged as a major concern by the Economic Survey conducted by the government in 2022-23. The survey stated that startups in India were struggling with:
- Elusive funding,
- Revenue generation struggles,
- Lack of easy access to supportive infrastructure,
- No support for Intellectual Property protections
- Wading through the regulatory environment and tax structures.
As such, companies were choosing to move their headquarters to countries with favourable legal environments and taxation policies. The survey noted that the “growing maturity of India’s capital markets” has slowed down flipping, and incentivized companies to explore “reverse flipping” — moving headquarters back to India. One of the suggestions it gave to encourage re-flipping was by simplifying the “multiple layers of tax and uncertainty due to tax litigation”. However, based on the tax Walmart paid, and the statement by the Minister, it seems that India isn’t making it all that easy for companies to come back to India.
Y Combinator and the push for flipping:
Besides the challenges described by the survey, another reason to shift headquarters abroad is to access foreign funds. For instance, In 2020, Inc42 reported that Indian startups selected for the startup accelerator Y Combinator’s 2019 and 2020 batches had been mandated to shift their headquarters to the US. This move saw criticism from some, like the founder of InfoEdge Sanjeev Bikhchandani who called this an “institutionalized transfer of wealth”.
Shades of the East India Company type of situation here – Indian market, Indian customers, Indian developers, Indian workforce. However 100% foreign ownership, foreign investors. IP and data transferred overseas. Transfer pricing issues foggy. https://t.co/gANDVZOceS
— Sanjeev Bikhchandani (@sbikh) December 4, 2020
Why are companies re-flipping?
Founder of the venture capital firm AvraCap, Anu Hariharan, argued on X that startups initially move abroad looking for funding, only to later come back when they want to list their business on the Indian stock exchange.
Startup in India becomes Delaware Inc to raise money from US investors
Scales the business in India successfully
Has to flip back to Indian entity to list in India
Pay >20% in taxes to the US govt during the flip which is usually a hefty amount in the hundreds of millions of…
— Anu Hariharan (@anuhariharan) January 31, 2024
Ola Founder Bhavish Aggarwal disagreed, stating that instead of foreign domicile companies, startups based out of India are the ones that are more likely to be funded.
Disagree @anuhariharan. Significant majority of funding into Indian companies has come into Indian domiciled companies.
Domiciling companies outside India was driven by shortsighted investors. Every entrepreneur who did this regretted.
At @Olacabs @OlaElectric @Krutrim we were… https://t.co/FEustxVo0q
— Bhavish Aggarwal (@bhash) February 1, 2024
What has the government done to encourage re-flipping?
In March 2023, the International Financial Services Centres Authority (IFSCA) set up an expert committee to identify a roadmap to encourage Indian fintech startups domiciled abroad to relocate to India, specifically to the International Financial Services Centre (IFSC) in GIFT City, Gujarat. This is a special economic zone (SEZ) designed for financial institutions that serve non-residents and deal with foreign currency.
In September 2023, this committee made a series of recommendations to ease the process of re-flipping, one of the key ones being to eliminate the tax burden on the relocation of the offshore holding company to GIFT City.
Measures to support this include
- no tax for the offshore holding company on relocation,
- no tax for the shareholders of the offshore holding company on relocation to GIFT City,
- grandfathering of existing investment of the holding company,
- allowing carry forward of losses despite the change in ownership,
- reduced compliance obligation for the investors of the offshore holding company, etc.
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