The Union Budget may incentivize foreign-domiciled Indian startups to relocate to GIFT City with minimal tax impact. This initiative aims to boost GIFT City's competitiveness with tax incentives and other benefits.
Government plans in the upcoming Union Budget could encourage foreign-domiciled Indian start-ups to relocate their headquarters to India, particularly to GIFT City, with minimal tax impact, as per a report by Moneycontrol. The aim of the initiative is to offer tax incentives and other benefits to boost GIFT City's competitiveness against other global financial centers like Dubai and Singapore.
Additionally, there are considerations for a future policy allowing companies based in GIFT City to list on Indian stock exchanges like BSE and NSE, as per the report. These measures are expected to facilitate the return of unicorns such as Razorpay, Zepto, and Meesho to India and enable them to access the growing demand from mutual funds and retail investors for tech stocks in the country.
As per the report, the eligibility criteria for this scheme would be that the company should be unlisted, it should be started by an Indian citizen, and “substantial value of the company’s shares is derived from assets or businesses in India." Further, the scheme could be designed in such a way that relocating to GIFT IFSC (International Financial Services Centre) would have no significant impact on the tax liabilities of foreign-domiciled start-ups.
So, what is Gift City?
Gujarat International Finance Tec-City, also called GIFT City, is a central business city in Gujarat that goes by the tagline ‘new epicentre of global finance and IT’.
As per the website, GIFT City offers a unique environment for vital economic activities, featuring globally recognized regulations, taxation, policies, and more, backed by the Government of India and Gujarat.
Established in June 2007, GIFT City is a long-standing endeavor by India to establish an international financial services center (IFSC). It functions as a versatile Special Economic Zone (SEZ), providing tax benefits and simplified regulatory frameworks. Gift City’s regulatory body is the International Financial Services Centers Authority.
Reverse Flipping and the Expert Committee
Several start-ups are reverse flipping or shifting their domicile back to India. The latest start-up to do the same was Groww, which shifted its domicile to the USA. Similarly, PineLabs got the approval of the Singapore court to shift its domicile back to India.
The strong growth of the Indian economy has spurred the reverse flipping trend, as per Commerce Secretary Sunil Barthwal. Similarly, Gift City in India offers options such as tax holidays to Indian start-ups, as mentioned before. According to the interim budget for 2024–2025, the tax vacation available to start-ups, sovereign and pension funds, and specific investment units situated in GIFT City's International Financial Services Centre (IFSC) would be extended by one year until March 31, 2025.
Further, to identify how to encourage Indian start-ups to shift their domicile back to India, an expert committee was set up that submitted its report to the International Financial Services Centres Authority on August 20, 2023.
The expert committee, while highlighting that most start-ups shift to the USA, Singapore, and the UK, highlighted that, as per estimates, “56% of 108 Indian Unicorn startups are domiciled in offshore jurisdictions.”
As per the committee, many Indian start-ups opt to set up offshore operations due to India's comparatively high corporate tax rates, which can be a substantial burden for young and expanding companies. India's average corporate tax rate stands at 25.17 per cent, inclusive of surcharges and cess, surpassing rates in countries like Singapore (17 per cent), the USA (21 per cent), and the UK (19 per cent), adds the committee.
Thus, the committee came up with a few guidelines to encourage start-ups to shift their domicile back to India. This includes increasing the limit under the Liberalized Remmitance Scheme. Currently, foreign outward transfers without RBI clearance are limited to $250,000 per financial year.
The committee further highlights that to encourage offshore holding companies to move to GIFT City, efforts should focus on ensuring tax neutrality to avoid negative tax impacts on these companies and their stakeholders relocating to India. Additionally, barriers to listing start-ups on IFSC stock exchanges, such as revenue and profit thresholds, should be relaxed or exempted to facilitate easier access to capital markets for start-ups.