Rethinking Policies: Can A More Friendly Tax Regime Lure Unicorns To Reverse Flip?

The inaugural wave of modern entrepreneurs or new-age ventures (startups), spanning from pioneers like Flipkart to various enterprise tech startups, opted to set up their bases overseas. Between 2010 and 2020, a multitude of startups, including the likes of Freshworks, Innovaccer, Glance, 5ire, Uniphore, and Druva, alongside numerous others, adopted foreign frameworks in accordance with international regulations.

Inc42’s latest “Decoding India’s Unicorn Club Report 2023” reveals that 18% (20) out of 110 Indian unicorns currently have their headquarters outside India. Notably, 83% (13) of these foreign-based unicorns belong to the enterprise sector, with the United States being the most favoured international destination. The remaining seven unicorns operate across domains like ecommerce, media and entertainment, travel tech, and clean energy.

Extending beyond the realm of unicorns, a palpable exodus of startups has become conspicuous, especially within the fintech sphere and, more recently, in the crypto space.

In the mid of 2022, a multitude of Indian crypto startups relocated to regions like Dubai, Delaware, and the British Virgin Islands (BVI). A confluence of factors — ranging from India’s intricate regulatory landscape and the allure of foreign capital to tax efficiency, international stock exchange listing prospects, global expansion possibilities, and exit avenues — have propelled this trend.

Chirag Shah, Senior VP – Fundraising and Strategy at Blacksoil Capital highlights that despite India’s endeavours to attract enterprises and enhance its business environment, persistent obstacles dissuade many entities from establishing their headquarters within its borders.

“Foremost among these challenges is the complex international tax structure, with its intricate regulations and comparatively elevated corporate tax rates serving as deterrents. The unpredictability of tax regulations and the spectre of dual taxation further dampen the enthusiasm for business investment,” he added.

Nevertheless, the green shoots of the trend reversal have begun to show. In October 2022, fintech unicorn PhonePe relocated its headquarters from Singapore to India in the run-up to its IPO plans, even though the transition incurred a substantial INR 8,000 Cr expenditure.

Download The Report

“We have about 20-odd unicorns that have already reached out to us asking how do we get this changed,” mentioned PhonePe CEO Sameer Nigam during a YouTube conversation with CTO Rahul Chari.

Notably, industry titans such as Razorpay and Groww are now contemplating shifting their respective headquarters to India.

Reshaping Tax Policies: A Blueprint To Attract Unicorns Back To India

Call it the ‘Desh Wapasi’ or ‘Reverse Flipping’ trend, India’s taxation policies stand as a pivotal determinant that could potentially entice Indian unicorns to return home.

In recent years, the Indian government has implemented a range of measures aimed at mitigating tax-related challenges faced by companies. Notably, these measures encompass a decade-long exemption from capital gains tax for investments originating from angel investors and venture capitalists to a three-year tax respite extended to freshly established startups.

Despite these progressive steps, India continues to uphold one of the loftiest corporate tax rates, compounded by a tiered structure instead of a uniform flat rate.

Today, the country has the opportunity to embrace a more competitive and stable tax framework as a solution. This can be achieved through the further reduction of corporate tax rates and the strategic application of targeted tax incentives tailored to specific industries, thus creating a conducive environment for companies to establish their central operations within the nation. Equally vital is the establishment of a transparent and efficient tax administration coupled with measures that thwart double taxation through the implementation of bilateral tax treaties.

Download The Report

Moreover, the synergy between the government, industries, and international organisations becomes imperative for the overhaul of the international tax architecture. The integration of global best practices and alignment with international standards can significantly enhance India’s attractiveness to potential investors.

“By creating a business-friendly tax ecosystem that emphasises simplicity, predictability, and competitiveness, India can encourage more companies to establish their headquarters in the country, boosting economic growth and global investment,” Shah added.

Why Reverse Flip Now?

It’s widely believed that once a startup is registered abroad, navigating through regulatory and other issues can create obstacles when attempting to bring them back to India.

However, Rajeev Suri, a partner at Orios Ventures, holds a different viewpoint. He asserts that startups primarily focussed on the Indian market would benefit from relocating their operations to India. This shift offers several advantages, including streamlined registration and jurisdiction processes, better access to banking, lending, and funding services, as well as a synergistic relationship between financial and market news.

He further emphasises that maintaining banking operations in a foreign country, with exposure to currency risks, inflation, and interest rate fluctuations, isn’t prudent in today’s volatile economic climate.

He cites the SVB (Silicon Valley Bank) incident in March 2023, when trading was suspended due to takeover rumours, leading startups to withdraw and transfer their funds, causing the bank’s collapse.

Investors and financial experts contend that the Reserve Bank of India (RBI) and the Indian government now possess a compelling incentive to enhance the ‘ease of doing business’, particularly in terms of banking regulations and taxation related to capital flows for Indian startups.

The January 2023 Economic Survey outlines six pivotal steps to achieve this goal:

• Simplifying the process for obtaining “inter-ministerial board (IMB) certification” for startups
• Streamlining taxation on employee stock options (ESOPs)
• Addressing complex layers of taxation and the uncertainties arising from tax litigation
• Facilitating capital flows with reduced restrictions on inflow and outflow and treating hybrid securities
• Fostering collaborations with established private entities to cultivate best practices and mentor startup founders
• Enhancing India’s startup incubation and funding landscape in emerging domains like social innovation and impact investment.

In addition, infrastructural advancements such as Bharatmala, smart cities, and GIFT City, along with efforts to enhance global competitiveness and bolster the skilled workforce, are likely to play a pivotal role in attracting businesses.

Notably, after the International Financial Services Centres Authority (IFSCA) formed a panel in March 2023 to promote the reverse flipping of Indian startups, the committee’s mandate included identifying challenges faced by local startups abroad and recommending measures to catalyse the growth of GIFT City into a global fintech hub.

While the one-size-fits-all strategy isn’t applicable, it’s clear that the government is earnestly exploring avenues to prevent the migration of Indian businesses. The domestic investor ecosystem has also gained momentum, with over 240 funds established by Indian investors from January 2021 to August 2023, amounting to more than $30 Bn, according to Inc42 analysis.

This trend is likely to encourage Indian startups to consider raising funds in Indian rupees and maintaining their operations within the country. However, given the intricate nature of the Indian ecosystem, expecting a significant number of startups to reverse flip in a short period could prove to be a bit too ambitious.

Download The Report