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Bringing Indian Startups Back home There has been a persistent trend of overseas incorporation of Indian startups over the years. Overseas incorporation poses concerns for the Government,as there are long-term losses in various tax-revenues and very often results in foreign ownership of Intellectual Property which India's Startup ecosystem is creating

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Over the past year, we have widely celebrated the growth of our startup ecosystem, resulting in the creation of over 100 unicorns; afeat that should make us proud. Having been personally involved in the implementation of the Government's Startup India programme, it is even more satisfying to witness this tremendous achievement.

It is however concerningtonote an analysis by VC Circle earlier this year, whichfound outthat 19 out of the 100 Indian or Indian-origin startups having achieved unicorn status at least once are now headquartered outside the country. In 2022 alone, six of the 17 unicorns, have their headquarters set up overseas.

There has been a persistent trend of overseas incorporation of Indian startups over the years. Overseas incorporation poses concerns for the Government,as there are long-term losses in various tax-revenues and very often results in foreign ownership of Intellectual Property which India's Startup ecosystem is creating.

A studyby the Tax Justice Network from 2022 suggests that Indian Government may be losingup to $10Billion a year due to incorporation ininternational-tax jurisdictions. This reflects thepotential massive revenue loss due to overseas incorporation of Indian startups, and thus creates the need to reflect on the motivators for such moves, as well as strategizeon policy-measures which can prevent suchactions.

What is encouraging international incorporation

Interactions with leaders in the startup ecosystem have brought out a few prime reasons for increasing overseas incorporation, which includebetter tax-regulations, anenhanced ease of doing business ecosystem for startupsand simpler regulations for market-listing, which is the ultimate aim for most unicorns.

Of the three-reasons, tax-regulations have emerged as one of the key motivators for overseas incorporation. The current corporate tax-rate in India, after progressive reductions and exemptions, continues to be higher than neighbouring countries such as Singapore, wherein a growing number of startups are incorporating (India offers a tax rate of 22 per cent for existing enterprises vis-a-vis 17 per cent offered in Singapore). Similarly, the said neighbouring jurisdiction also offers a more competitive advantage for startup investors on other taxes such as the capital gains tax and dividend distribution tax.

Another key motivator for overseas incorporation is often the ability for startups to list their ventures with lesser regulatory complications. While admittedly, SEBI has taken a host of progressive measures to simplify regulatory norms for startup listing via its Innovators Growth Platform (IGP), members in the startup community feel that the additional disclosure norms released by SEBI in September this year can be more conducive.

General ease of doing business is also one of the key motivators for overseas incorporation, including contracts-enforcement, business establishment norms, enhancing merger approval timelines, as well asconducive regulatory frameworks for emerging industries – witnessed in the context of the virtual digital assets industry players which areincreasingly incorporating in certain middle eastern countries.

These are some of the reasons, which should not discourage us, but rather encourage us to study in detail and resolve the same expeditiously. India is well poised to address each of these issues, which must be done expeditiously. Over the past few years, the willingnessof the Government to undertake bold regulatory reforms has been a positive and hopeful trend.

Where do we go from here: Bringing Indian startups home

As various departments of the Government now work towards proposals for the forthcoming Union Budget, there are a few recommendations which can be considered. A two-pronged strategy may be considered in this regard.

To begin with, the Government may invite and incorporate relevant recommendations on the policy-regulatory reforms required for the startup ecosystem, which the Damodaran Committee on PE/VC Investments set up by the Union Ministry of Finance is taking the lead on.This will help us identify and resolve the regulatory challenges which can discourage listing abroad.

Secondly, for startups that are already incorporated overseas, the Government may consider a special limited-period under which Indian startups are provided an option to re-incorporate in India, for which they can be provided tax-breaks on corporate-taxes, capital-gains taxes, divided taxes for a prescribed period (five to seven years). The limited period window, as a result of the tax breaks provided over a period, will allow for considerable additional income potential for the startups as well as for the Government. While it may result in comparatively lesser revenues for a period, from a long-term perspective it will add positively to state's revenues. Such a solution could be mutually beneficial for all the concerned stakeholders.

At the end of the day, the fact remains that overseas incorporation of Indian startups is not in the best interest of revenues of the state and therefore, introspection and reforms are the way forward.

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