How GIFT IFSC can encourage Indian startups to shift HQs back home

Indian startups shifting their headquarters abroad due to favourable regulatory frameworks and ease of doing business. However, they can be brought back with tax neutrality, simplified holding company structures, and other measures in GIFT City, according to an IFSCA committee.

How GIFT IFSC can encourage Indian startups to shift HQs back home

Monday September 11, 2023,

7 min Read

When PhonePe shifted its domicile from Singapore to India in October last year, it created quite a buzz about ‘reverse flipping’. CEO Sameer Nigam even said numerous unicorn startups were looking to shift their base back to India, and Razorpay even considered moving, however, the phenomenon seems to be a phantom.

The reality is rather worrying. Many young companies, such as Polygon, Amagi, and Innovaccer, are shifting their headquarters outside the country while their entire operations are domestic. This has negative implications for the Indian startup ecosystem, which is now the world’s third largest with ambitions to grow further.

To arrest this trend and invite these companies back into India, the government body International Financial Services Centres Authority (IFSCA) came out with a set of recommendations, putting the International Financial Services Centre (IFSC) in GIFT City, Gujarat at the centre of its plan.

The 10-member committee of experts on ‘Onshoring the Indian Innovation to GIFT ISC’—headed by the former executive director of RBI, G Padmanabhan—stated that there is “a steady increase in founders wanting to externalise/flip their structure.” It estimated that 56% of the 108 Indian unicorn startups are domiciled in offshore jurisdictions.

The committee—which had Zerodha Co-founder Nikhil Kamath, 3one4 Capital Founding Partner Siddarth Pai, Avana Capital Founding Partner Anjali Bansal, and Groww Co-founder Lalit Keshre among others as members—noted that transferring the entire ownership of Indian startup to an overseas entity is accompanied by a transfer of all IP and data. The Indian startup then becomes a 100% subsidiary of a foreign entity, with the founders and investors retaining the same ownership after swapping shares.

“Flipping essentially creates a peculiar situation for Indian startup ventures, whose founders are Indian, employees are majority Indians, activity is predominantly in India, but the holding company is domiciled overseas,” the report noted.

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Why startups flip

The key drivers for Indian companies moving their base abroad are favourable regulatory frameworks and ease of doing business in overseas locations. However, there are multiple reasons behind taking this step:

Gift city infographic

High corporate tax rate: The average corporate tax rate in India is 25.17% (including surcharge and cess). It is higher than the corporate tax rate in many other countries, including Singapore (17%), the US (21%), and the UK (19%), which allows startups to reduce their tax liabilities and retain more profits. 

Investor push: Several foreign investors and incubators insist on companies shifting overseas as a pre-condition for funding. These investors stand to benefit from lower tax rate and other incentives.

Access to global capital: Indian startups are increasingly drawn to countries like Singapore, the US, and the UK to seize access to abundant private capital.

Weak IP protection laws: The robustness of Intellectual Property (IP) laws and enforcement mechanisms in overseas jurisdictions like the US and Singapore provide a sense of security to startups that their innovative products, technologies, or services will be safeguarded, while this is not the case in India.

Attracting global talent: Countries such as the US, UK and Singapore are emerging as attractive destinations for talent acquisition.

Global customer base: Shifting headquarters overseas introduces Indian startups to a wider customer base.

Global payment systems: These countries offer advanced and efficient financial infrastructure that facilitates seamless international transactions.

Impact on India

Indian startups shifting to overseas locations have a negative fallout for the country:

Brain drain: Brain drain leads to a loss of human capital, and stalling of innovation and technological advancements within the country.

Loss of value creation: Externalisation weakens the capacity of Indian startups to create value in the domestic market

Loss of India’s soft power: Digital diplomacy has become crucial to maintaining international relations as countries leverage their technological prowess for global influence. Flipping can affect India’s digital diplomacy efforts.

Tax revenue loss: While startups which externalise their holding companies may pay significantly lower tax, the Indian government will have lower earnings as a result.

Wealth concentration and inequality: Setting up of holding companies outside India may contribute to wealth inequality as startups accumulate higher profits with lower tax rates, leading to increased wealth among shareholders and executives.

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Role of GIFT City

The expert committee recommended that the maiden International Financial Services Centre (IFSC) in GIFT City, Gujarat can play a significant role in bringing back startups to the Indian shores and prevent further flight of Indian innovation.

The IFSC in GIFT City was envisioned as an internationally recognised global financial centre with trusted business regulations, a competitive tax structure, and a focus on ease of doing business. The International Financial Services Centres Authority (IFSCA), which was legislated into existence in 2019, assumed the power of four domestic sector regulators—RBI, SEBI, IRDAI and PFRDA—for development and regulation of IFSCs in India.

The number of IFSC registered entities has grown to 530+ entities in July 2023 across the entire spectrum of international financial services business including banking, capital markets, funds, insurance, aircraft and ship leasing, fintech, etc.

GIFT IFSC is an offshore jurisdiction within the country and acts as a gateway for global capital inflows into and out of the country. As per the report, it offers several advantages including flexibility to transact in foreign currency, hassle-free movement of capital and investments, business-friendly regulatory environment, reduced compliance burden, attractive tax regime and financial incentives, access to PE/VC ecosystem, as well as access to fintech hubs.


The role of holding companies is central to enabling reverse flipping as these entities catalyse diversified investment, risk management, and enhanced market influence. However, regulations governing these entities in India are too complex.

For example, in Singapore, dividends are not taxed at the holding company level and there are no withholding taxes when distributing dividends to residents or non-resident shareholders. Many countries like The Netherlands and UAE also incentivise storing IPs and creating holding companies as regional headquarters.

PhonePe had to pay Rs 8,000 crore on behalf of its investors in capital gains tax when the company shifted its domicile from Singapore to India.

In India establishing holding companies poses several legal and regulatory challenges with multiple disclosure as well as compliance requirements.

The IFSCA committee has suggested that as GIFT IFSC has the advantage of being an offshore zone, it can be tested for providing simplified structures for incorporating holding companies. Here are some of the other recommendations:

Holding company structures: Simplified incorporation processes and procedures to be permitted in GIFT IFSC.

Incorporation of companies: All applications for incorporation of companies or setting up of branch offices in GIFT IFSC should be processed by a dedicated MCA official. There should be a common application form.

Liberalised Remittance Scheme (LRS): LRS limit for investment in IFSC should not be clubbed with the other general activities. It should be grouped under a different head with a higher investment limit than the current $250,000 per financial year.

Overseas investments: Investments made by Indian AIFs and mutual funds into entities domiciled in GIFT IFSC to be excluded from the aggregate limit set by RBI for making overseas investments.

Tax neutrality: Efforts should be made to ensure tax neutrality to not trigger adverse tax consequences for offshore holding companies and their stakeholders.

Capital gains tax: Have a “participation exemption” mechanism for exemption on capital gain tax on the transfer of shares, subject to meeting prescribed conditions.

Angel tax exemption: Angel taxation provisions should not apply to GIFT IFSC holding companies.

Listing on IFSC stock exchanges: Relax or provide exemptions for the listing of startups in GIFT IFSC, which would allow the startups to raise capital from global markets.

While one doesn’t need fundamental changes to enable reverse flipping, the committee recommends sorting out various minor issues.

“If implemented, it will catapult GIFT IFSC in becoming a global hub of startups wanting to explore the Indian market,” the committee noted.

Edited by Kanishk Singh