Economic Survey 2022-23: Indian start-ups exploring reverse-flipping

Suggests simplifying tax layers, capital flow procedures like those in the US, Singapore

Indian start-ups are exploring ‘reverse flipping’, or shifting their domicile back to India, with easy access to capital from private equity and venture capital, changes in rules regarding round-tripping, and the growing maturity of India’s capital markets, observed the Economic Survey 2022-23.

This comes a month after it emerged that such a shift by PhonePe cost its investors around Rs 8,000 crore in taxes to allow the financial technology unicorn to domicile in India.

During a recent video session, the founders of PhonePe said over 20 start-up unicorns and their investors were looking for ways to move back to India from Singapore.

The Survey also suggested measures like simplifying multiple tax layers, resolving uncertainty due to tax litigation, especially of employee stock ownership plans, exploring the incubation and funding landscape for start-ups in emerging fields like social innovation and impact investment, and facilitating mentorship programmes through partnerships with established private entities.

The Survey also pointed out several challenges start-ups face, such as funding hurdles, revenue generation struggles, lack of easy access to supportive infrastructure, and a complex regulatory tax environment. It added that many start-ups have been headquartering overseas, especially in destinations with favourable legal environments and taxation policies, technically known as ‘flipping’.

Flipping refers to the process of transferring the entire ownership of an Indian company to an overseas entity, accompanied by a transfer of intellectual property (IP) and all data hitherto owned by the Indian company. This effectively transforms an Indian company into a 100 per cent subsidiary of a foreign entity, with the founders and investors retaining the same ownership via the foreign entity, having swapped all shares.

“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,” it said.

The start-up sector welcomed the observations made by the Survey.

Nandini Mansinghka, chief executive officer of Mumbai Angels, told Business Standard, “Flipping in the start-up system has been a source of immense value flight for the past few years. These steps by the government to stem the tide will give a welcome push to making India the largest start-up ecosystem in the world.”

To accelerate this process, the Survey suggested measures such as simplifying taxation and procedures for capital flows, akin to countries like Singapore, the United Arab Emirates, and the Netherlands, which “incentivise companies to store IPs and create holding companies as regional headquarters”.

It also suggested simplifying the process for the grant of an ‘interministerial board’ certification for start-ups.

The Survey also added that India ranks among the largest start-up ecosystems in the world, with about 48 per cent of young companies in the country being from tier II and III cities.

In addition, over 900,000 direct jobs have been created by the Department for Promotion of Industry and Internal Trade-recognised start-ups (self-reported), with a 64 per cent increase in 2022, compared to the average number of new jobs created in the previous three years. The number of direct jobs created by up-and-coming companies jumped from 43,000 in 2017 to 269,000 in 2022.

The government has also strengthened its intellectual property rights regime, the Survey said, by modernising the IP office, reducing legal compliances, and facilitating IP filing for start-ups, women entrepreneurs, small industries and others. This has resulted in a 46 per cent growth in the domestic filing of patents between 2016 and 2021.

According to the Global Innovation Index 2022 Report, India entered the top 40 innovating countries for the first time in 2022, by improving its rank from 81 in 2015 to 40 last year. Further, India became the most innovative nation in the lower middle-income group, overtaking Vietnam (48th) and leading the central and southern Asia region.