SaaS startups may come under tax lens for adopting flipped structure


Software product startups which have taken their intellectual property (IP) overseas by adopting the so-called flipped-structure methodology might come under the tax division’s scanner.

Revenue authorities really feel that India is getting shortchanged due to this methodology adopted by some firms, not simply on the potential asset worth created by the IP, but additionally on tax assortment, two individuals conscious of the matter mentioned.

Many startups that present software program as a service (SaaS) have replicated the Indian shareholding sample in different jurisdictions — or flipped buildings — earlier than they opted for a big funding. This would imply a overseas entity would personal the Indian enterprise together with the IP, which in lots of circumstances holds essentially the most worth.

Many massive buyers are reluctant to spend money on startups if they don’t personal Indian property by way of a holding firm registered in jurisdictions resembling Singapore or Mauritius, the individuals mentioned. This is especially as a result of buyers really feel it could be simpler to take these firms international later if they aren’t primarily based in India. Also, a number of international buyers don’t want to take care of Indian regulators and tax authorities immediately, they mentioned.

“Startups looking to externalise need to be mindful of several issues like application of roundtripping and tax impact on flipping and subsequent exits. In case of SaaS startups, which have a global clientele, flipping can result in significant value being captured outside India without corresponding taxes being paid in India. The Indian arms would typically be remunerated at a cost-plus model while the overseas entities would be earning much higher returns due to exploitation of IP,” mentioned Amit Maheshwari, a associate tax and consulting agency AKM Global.

The tax division might have a look at scrutinising whether or not these buildings maintain water, or whether or not there’s substance within the nation that they’ve holding firms.

“Many startups have changed structures and now hold Indian entities through foreign holding companies, but when it comes to Singapore, substances have to be created and very often we see one or more of the promoters move there, along with transfer of IP assets,” mentioned Pier Counsel associate Vatsal Gaur. Several Indian startups have been lively on the SaaS entrance currently as they’ve been creating alternate options for well-established software program merchandise.

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