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Budget may launch ghar wapsi scheme for Indian startups to flip to GIFT City

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NEW DELHI : The upcoming Union Budget could see the government paving the way for foreign-domiciled Indian startups to flip their corporate headquarters back to India — via the special economic zone of GIFT City — with minimal tax implications, according to industry executives in the know.

In a bid to make Gujarat International Finance Tec-City, or GIFT City compete with global financial hubs like Dubai and Singapore, the Indian government has been trying to woo companies to the city with tax-breaks and other sops.

Sources said that the government might further follow up with another policy at a later date to allow companies domiciled in GIFT City to list on Indian bourses like BSE and the National Stock Exchange (NSE).

These moves would not only ease the flipping back of unicorns like Razorpay, Zepto and Meesho to India, but also help them tap into the growing mutual fund and retail investor appetite for tech stocks in the country.

“The eligibility criteria for the scheme might include riders like the company should have been started by Indian citizens, it should be unlisted and substantial value of the company’s shares are derived from assets/business in India,” said a source close to the developments.

“As far as discussions are concerned, the scheme could make it tax neutral for foreign-domiciled startups to shift to GIFT IFSC. Just as Budget 2021 had announced a repatriation scheme for foreign funds to redomicile to GIFT IFSC in India in a tax-free manner, a similar provision can allow startups to redomicile to India,” she added.

An e-mail sent to finance ministry for an official comment did not elicit any response at the time of publishing. The story will be updated if we receive a response.

While the government has been exhorting foreign-headquartered startups to relocate to the special economic zone in Gujarat, it has not yet found any significant takers as yet.

Meanwhile, Walmart-owned PhonePe saw a hole being burnt in its pocket last year as it was forced to spend nearly a billion dollars in tax payments to re-domicile the company from Singapore to India.

“I hope things will get easier. If you want to move from any other market to India as a domicile, it is treated as a capital gains event for existing investors. So, they have to make a fresh mark to market valuation, and you have to pay tax on the delta,” PhonePe founder and chief executive officer Sameer Nigam said in January 2023.

“At least 20 existing unicorns want to come back to India and domicile here, they have reached out to us, if regulations get much easier,” he added.

The government’s annual Economic Survey of 2023 had recognised the challenges faced by startups looking to reverse-flip or shift their domicile back to India.

It suggested measures like simplification of employee stock option (ESOP) taxes, capital gains tax regimes like those of Singapore, the United Arab Emirates (UAE) and the Netherlands, and capital flow procedures akin to geographies like the US and Singapore to accelerate reverse-flipping.

Typically, “flipping” happens at the early stage of the startups, driven by commercial, taxation and personal preferences of founders and investors.

For example, startups like Zepto and Razorpay had flipped to the US to be able to participate in a major incubation programme run by YCombinator. Also, some companies decide to “flip” because the major market of their product is offshore which is typical in the software-as-a-service (SaaS) sector. Many prefer to domicile in countries where they are likely to access the capital market later for better valuations and ticket size.

Further, in popular holding company jurisdictions like Singapore, dividends received from a Singaporean company or subsidiary are not taxed at the holding level. There are no withholding taxes when distributing dividends to residents or non-resident shareholders. This is a critical component since the dividend is one of the most popular repatriation tools.

Better protection and enforcement of intellectual property 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 had said.

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