Tax authorities are known to be investigating possible transfer price violations by startups that flipped their structures to hold their assets, shareholding, and in some cases even intellectual property outside India.
In the last few years, multiple startups have created foreign companies in the US or Singapore, among other countries, for holding their Indian businesses.
Once an Indian startup incorporates a holding company outside India, the Indian entities of such companies operate like intermediaries and only pay tax on part of the payment.
The news, first reported by the ET, comes days after Indian internet entrepreneur Sanjeev Bikhchandani had called foreign investors the new East India Company while calling out the practice of Indian startups flipping their structures as responsible for robbing the country of its intellectual property, taxes and data.
“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,” Bikhchandani wrote on Twitter.
Bikhchandani’s tweets had come in response to a Twitter user questioning why Y Combinator, an American seed money startup accelerator, needs to force Indian companies to flip their structures.
Bikhchandani is the founder of jobs portal naukri.com and matrimony portal jeevansaathi.com, real estate search engine 99acres.com and education portal shiksha.com, and an investor in online food delivery outfit Zomato and insurance marketplace, policybazaar.com.
Meanwhile, an Inc42 Feature, “Is Y Combinator Causing Long-Term Damage To India’s Tech Economy?”, examines the repercussions of the US-based startup accelerator’s decision to ‘flip’ Indian startups to American entities for the purpose of funding.
Foreign investors are insistent on taking the holding company outside India, as they don’t want to deal with Indian regulators and tax structures.
Several Indian startups looking to register overseas for an initial public offering (IPO) have also cited similar reasons i.e. more helpful regulations for startups in markets such as the US and Singapore, as reasons for them choosing to list overseas.