The Economic Survey 2023, tabled before the parliament by the Financial Minister Nirmala Sitharaman reviews the performance of the Indian economy to date and lays the road ahead for the next fiscal year.
In the economic survey, recent developments in Start-ups, like flipping and reverse flipping was observed, which may lead to implementation of UAE or Singapore like tax-regimes in place of the existing ones.
It was observed that many Indian companies have been getting headquartered overseas, especially in destinations with favorable legal environments and taxation policies. This was identified as ‘Flipping’, by the economic survey, as 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.
It effectively transforms an Indian company into a 100 percent subsidiary of a foreign entity, with the founders and investors retaining the same ownership via the foreign entity, having swapped all shares.
Typically, “Flipping” happens at the early stage of the Start-ups, driven by commercial, taxation and personal preferences of founders and investors. Some companies decide to “Flip” because the major market of their product is offshore. Sometimes, investor preferences like access to incubators drive the companies to “Flip” as they insist on a particular domicile.
“Some companies prefer to domicile in countries where they would like to access the Capital Market later for better valuations and ticket size. Better protection and enforcement of IP and tax treatment of Licensing revenue from IP, residential status of Founders, and agile corporate structures have been the reasons for “Flipping” in the Past”, the survey observed.
However, of late, with relatively easy access to Capital through a vibrant Private Equity/Venture Capital Ecosystem, changes in rules regarding round tripping, and the growing maturity of India’s capital markets have not only slowed down the Flipping, but companies are also exploring “Reverse Flipping”, as per the observation of the economic survey.
The economic survey of 2023 further went onto elaborate the measures that could be taken to promote “reverse flipping” of startups back to India, which include:
i. Simplifying the process for grant of “Inter-Ministerial Board (IMB) certification” for Start-ups
ii. Further simplification of taxation of Employee Stock Options (ESOPs)
iii. Simplifying multiple layers of tax and uncertainty due to tax litigation
iv. Simplifying procedures for capital flows: Many countries, such as US and Singapore, have easier
corporate laws, with lesser restrictions on the inflow and outflow of capital and treatment of
Hybrid Securities
v. Facilitating improved collaboration and partnerships with established private entities to develop
best practices and state-of-the-art start-up mentorship platforms
vi. Exploring the incubation and funding landscape for start-ups in emerging fields like social
innovation and impact investment.
“The flipping phenomenon mentioned above reflects start-ups venturing out for short-term gains in the dynamic, uncertain geopolitical world. However, the flip can be reversed with collective action by the Government related regulatory bodies and other stakeholders. With solution-oriented strategies, start-ups will continue to be the messengers of India’s entrepreneurial dynamism”, the survey concluded, with a positive nod to measures in favour of bringing ‘flipping’ startups back to India.
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