India is home to more than a lakh startups. But how many of them are actually headquartered in India? This is a question that does not strike the minds of ‘aam aadmi’ but is definitely on the legal minds of lawyers and chartered accountants. The process wherein a company locates its headquarters outside India is known as ‘flipping’. The reasons are obvious. A businessman would want to locate a company where there are favourable policies, effective tax considerations, wider visibility, investors, and robust stock exchanges.
When these companies were born, India was growing its standards in ease of doing business. Now, we see a new trend – ‘reverse flipping’ or ‘ghar wapsi’.
Last month in May, Groww shifted its domicile back to India from the United States. PhonePe, in October 2022, shifted back from Singapore. Several other startups like Pine Labs, Razorpay, Zepto, Eruditus, Meesho, and Udaan are planning to move their company domicile back to India. Planning to move its IPO, Flipkart may also be in the process of shifting its headquarters from Singapore to India.
It seems like having an overseas entity, holding company or headquarters in the US or Singapore isn’t making sense anymore. These companies have a wide range of consumers in India and enjoy mass popularity as well. Their decision to stay overseas over the years must have its rationale in raising funds from foreign capital, listing on foreign stock exchanges, tax benefits, investor confidence, regulatory ease of doing business, etc. Investors abroad would prefer to invest in companies listed in their jurisdictions. But now, we see a shift in mindsets as these companies turn profitable. As their CEOs can ‘work from anywhere’, so can these companies.
In March last year, the government noted that many Indian startups were domiciled abroad and set up a committee to suggest ways “to onshore the Indian innovation” to the International Financial Services Centre in Gujarat’s high-tech GIFT City. The terms of reference of the Committee included suggesting measures to encourage Indian Fintech/Startups domiciled abroad to relocate to GIFT IFSC, identifying issues that may be critical for the development of GIFT IFSC as a global Fintech Hub, and encouraging new Fintechs with a global outlook to set up a commercial presence in GIFT IFSC. Incidentally, Groww’s Co-Founder & CEO Lalit Keshre is also a member of this Committee.
In the intricate symphony of global business, the transfer of corporate entities across borders isn’t just a strategic shuffle, it’s also a fiscal labyrinth. The recent case of PhonePe serves as a stark reminder where the company, on behalf of its investors, had to cough up a staggering Rs 8,000 crore in taxes upon returning to Indian soil. This sheds light on the formidable financial intricacies that accompany such relocation endeavours. Companies like Meesho also need to raise additional funds to counter these additional tax payouts.
At the heart of this fiscal journey lies the meticulous navigation of legal and tax frameworks, a task rife with challenges as value migrates between international jurisdictions. Indeed, the crux of such restructuring efforts is to mitigate the tax burdens that come with shifting ownership structures. Companies also need to comply with mergers and acquisitions, competition law, securities law, and regulations from RBI and SEBI. In cases of reverse mergers or transfers of ‘control,’ the approvals take longer.
Valuing startups becomes a pivotal point, guiding the trajectory of tax implications amidst restructuring endeavours. Whether opting for a share swap or sale, a thorough evaluation of tax ramifications for investors and promoters is imperative. Notably, exemptions under relevant tax treaties can ease fiscal strain, especially for investors from countries like the Netherlands or Singapore. However, with limited cases in view, this is an area yet to be explored.
The timing also plays a critical role in this fiscal calculus. Apart from present structuring, foreseeing future tax implications upon exit requires foresight, considering grandfathering benefits under existing tax treaties. Additionally, attention must be paid to the potential lapse of accumulated losses within the Indian corporate landscape due to changes in shareholding.
The exploration of alternative structural modalities reveals their own complexities and regulatory demands. Inbound mergers, for example, offer a viable pathway, potentially leading to a tax-neutral outcome, provided they adhere to conditions outlined in the Indian Income Tax Act, 1961 which are in itself a task to comply with.
In conclusion, the saga of the reverse flip extends beyond theory into practical problems of fiscal gravity, where the nuances of timing and structural choices converge to shape tax obligations. As corporate entities embark on transnational relocations, they must grapple not only with performance demands but also with the fiscal shadows that accompany each move.
Aditya Trivedi is a Delhi-based corporate lawyer; Harsh Mantri is a Mumbai-based chartered accountant. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect News18’s views.
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