India’s tax department could see a substantial boost in revenue—around Rs 20,000 crore—over the next year as several start-ups look to “reverse flip” their overseas corporate structures back to India. According to officials with knowledge of the matter, over half-a-dozen major venture capital backed companies, including Flipkart and Pine Labs, are in the process of shifting their international structures to India, enabling them to be eligible for domestic listings. This process, commonly referred to as reverse flipping, will lead to substantial tax payments from the shareholders of these companies.
Revenue boost
The tax department has already collected close to Rs 10,000 crore from just two reverse flipping transactions involving prominent start-ups, PhonePe and Groww, according to media statements issued by both the companies. In January 2023, Walmart-backed PhonePe became the first major company to successfully reverse flip its structure to India, paying nearly Rs 8,000 crore in taxes on the transaction, according to an official release issued by the company in January 2023 . These early cases suggest that additional reverse flips among similarly valued start-ups could bring significant tax revenues.
“Currently, consultations are ongoing with various stakeholders, including the government, on half-a-dozen additional reverse flips. Each of these companies is valued in billions, and the tax outgo is expected to be considerable,” a source familiar with the discussions stated.
The Indian government has signaled consistent support for companies choosing to reverse flip, including easing compliance requirements. However, it has remained firm on maintaining tax obligations for these restructurings.
Emails sent to the Central Board of Direct Taxes (CBDT), Flipkart, and Pine Labs for comments remained unanswered.
Overseas Incorporation Once Common
Before the COVID-19 pandemic, it was common practice for Indian start-ups, especially those backed by foreign venture capital and private equity funds, to incorporate overseas. Most of these companies, whose operations are in India, chose locations like Singapore and the US for incorporation.
By establishing a foreign corporate base, these start-ups aimed to secure potential listings on exchanges such as Nasdaq. India’s listing regulations required that companies incorporated in India to launch their initial public offering (IPO) in India, thus making overseas incorporation an attractive alternative for tech firms.
At the time, many start-ups doubted the Indian investment market’s readiness for their technology-driven business models, which often operate at a loss or lack of tangible assets.
However, that skepticism has largely dissipated in recent years, with prominent tech firms like Paytm, Zomato, and Policy Bazaar opting for listings on Indian bourses.
Furthermore, Swiggy, a major food aggregator, is now preparing for a public offering in India, while tech listings in the US, particularly on Nasdaq, have declined, reducing the allure of an overseas IPO. During the period between 2022 and 2024, benchmark index for US technology stocks Nasdaq grew only by 11% in comparison to Indian benchmark Sensex which grew 33%, data showed.
Data also shows a sharp decline in the IPO fundraising through Nasdaq platform in the years 2022 and 2023. According to official numbers, in 2020, Nasdaq saw fund raising to a tune of $95 billion while in 2021 it peaked at $108 billion. In 2022 and 2023, amidst so called ‘funding winter’ for technology companies, the fund raising on Nasdaq fell to $5 billion and $20 billion, respectively.
The resulting dip in foreign funding has prompted some start-ups to reevaluate the benefits of reverse flipping.
“Several technology firms pushed for a one-time tax exemption on reverse flips and delayed their restructuring in the hope of securing relief. However, it is now evident that there will be no tax waiver,” another source added.
How it works
To illustrate the process of reverse flipping, consider an Indian start-up that initially incorporated itself in Singapore. Under this structure, all shareholders hold shares in the Singapore-based parent entity, while the Indian subsidiary operates the business locally. During a reverse flip, the Singapore-based parent is dismantled, and its shareholders receive shares in the Indian entity in exchange. This transaction, involving the transfer of shares from a foreign entity with predominantly Indian business operations, is subject to Indian taxes under provisions that cover indirect transfers.
In practical terms, foreign shareholders who sell stakes in these overseas-incorporated Indian entities are also liable to Indian taxes, which is a significant shift from the previous overseas-only tax obligations. The tax arises in the hands of shareholders when he gets shares of Indian entity in exchange for the global company shares. Although the transaction does not involve selling of shares, even the exchange of shares is taxable for such transactions. Separately, when these investors eventually sell their India company shares through IPO, they will have to pay further capital gains tax.
The specifics of each reverse flip vary across companies, though the broad restructuring mechanics remain the same. Some start-ups opt for a direct share swap, while others make the foreign entity a subsidiary of the Indian one, maintaining flexibility in how they approach the transaction based on their specific corporate structures.
Government Stance
The government has encouraged reverse flipping but has insisted that companies must adhere to tax requirements. By supporting compliance easing, the government hopes to facilitate more reverse flips, positioning India as a favorable base for tech companies. The potential Rs 20,000-crore tax windfall aligns with broader fiscal strategies, ensuring that the burgeoning tech sector contributes to domestic tax revenues.
While the discussions continue, many start-ups now see a reverse flip as not just a legal formality but a strategic step in light of the softening Nasdaq listings and India's growing appetite for technology stocks. This tax-focused reshaping of start-up structures underscores India’s evolving investment landscape, as companies reestablish their roots within the country, potentially marking a new era for domestic tech investments and corporate listings.
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