INR 8K Cr Charge To Move Domicile To India: PhonePe CEO’s Revelation Raises Questions On EoDB For Startups

Fintech unicorn PhonePe’s investors paid a whopping INR 8,000 Cr for the decision to shift its domicile to India from Singapore, its CEO Sameer Nigam revealed recently, raising concern that paying such a huge amount in taxes is a “stiff shock” if a business is not at its maturity.

“I think it worked for us because we have very long-term investors…We have people like Walmart and Tencent and other balance sheet investors who can take a multi-decade view. But we have about 20-odd unicorns who (have) already reached out to us asking us how do we get this changed,” Nigam said in a YouTube conversation with PhonePe CTO Rahul Chari. 

It is pertinent to note that PhonePe shifted its base to India ahead of its plans to go public and at a time when several Indian startups are shifting their domiciles to Singapore for tax benefits. However, as Nigam highlighted, it must also be noted that several startups are currently willing to move to India if the tax regulations are eased. 

The Exodus Of Indian Startups 

As per an Inc42 analysis, 20 Indian unicorns are based outside India. About 65% of Indian unicorns that are headquartered abroad are from the enterprisetech (SaaS) sector. At least 13 enterprisetech unicorns are based outside India, while the remaining seven are from sectors including ecommerce, media and entertainment, traveltech, clean energy, and ecommerce.

Meanwhile, a majority of the Indian unicorns headquartered abroad are registered in the US. Beyond the unicorns, the exodus of startups has been highly visible in the fintech sector, particularly in the crypto space, of late.

In mid-2022, Inc42 reported that over half a dozen Indian crypto startups had moved to Dubai, Delaware, and the British Virgin Islands (BVI) in the wake of the crypto winter, the Indian government introduction of Tax Deducted at Source (TDS) for crypto transactions, and overall regulatory environment getting more stringent in the country. The fast-changing regulations in India have hurt not only the crypto startups but also the overall fintech space.

In October last year, ZebPay, one of India’s oldest crypto exchanges, applied for a licence in Singapore and was planning the same for the UAE.

All this has raised questions on the policies for emerging sectors, the taxation structure for startups, and also the government’s claims of promoting ease of doing business for startups.

In a 2021 report, the Bangalore Chamber of Industry & Commerce stated that Indian startups were moving their headquarters outside India majorly due to a complex capital gains tax system.

“There is an urgent need to reform the entire gamut of capital gains tax on securities and real assets in order to simplify the tax regime, ensure uniformity across asset classes, improve compliance, and reduce litigation,” said TV Mohandas Pai, chairman at Aarin Capital Partners, in his foreword in the report.

The exodus of startups has also caught the attention of the government. Stressing that the government would try to engage and understand the demands of the startups, Finance Minister Nirmala Sitharaman recently said, “I would think continuous engagement with the startups is what is going to help them to, one, remain (in India) and, second, do better within India. But if there are temptations for which they would want to go outside, we need to understand how much we can entertain and serve on those courses. Not all of them are possible, but…we can try.”

The Woes Of PhonePe 

In the interaction, the PhonePe CEO also said that the startup might lose about $900 Mn of accumulated losses unless the law changes by the end of March as under the current tax regulations, a move in domicile is considered as a restructuring event.

“There’s no distinction in Indian law between a restructuring where the pre and post-beneficial owners are the same versus another acquisition event and I think that’s at the heart of the challenge,” said Nigam.

However, Nigam also noted that some discussions are going on at the highest levels of government that would make it easier for startups that wish to come back to India.

Explaining the matter, Maneet Pal Singh, partner at I.P. Pasricha & Co, said, “Companies prefer setting up in tax havens such as Singapore & Mauritius due to various incentives. However, with double taxation avoidance agreements (DTAAs) coming into picture, operations in such countries are becoming unattractive. Recently, PhonePe changed its domicile earlier from Singapore to India and for that purpose, it will have to make a fresh valuation…” 

Singh further clarified that PhonePe stands to lose the chance to offset its $900 Mn of accumulated losses against future profits as shifting the domicile from Singapore to India is viewed as a restricting event under Section 79 of the Income Tax Act,1961.

“Shifting domicile to India from any other market is treated as a capital gain event. Further, as per the provisions of Section 79 of the Income Tax Act,1961, a company is not allowed to carry forward the losses if the change in beneficial ownership of shareholding of more than 50% occurred at the end of year in which losses were incurred,” he said.

The Walmart-backed fintech giant PhonePe recently joined the decacorn club by raising $350 Mn in funding at a pre-money valuation of $12 Bn from General Atlantic after it shifted its domicile to India in the latter half of 2022. 

Last month, PhonePe also became a separate entity by hiving off from Flipkart as the existing shareholders of Flipkart Singapore and PhonePe Singapore, led by Walmart, purchased shares directly in PhonePe India.