Start-ups look to Budget for tax neutrality on outbound mergers

Indian companies cannot directly list overseas, which is why some create a holding company overseas to own Indian business. This is referred to as flipping as the ownership structure changes from domestic to foreign.

As Indian tech startups look at avenues to globalise their businesses and raise private and public funds outside India, flipping of the ownership structures may become more commonplace going forward.

“With the relaxation in the new overseas investment regulations, it is likely that many Indian founders may look at creating an offshore holding-cum-operating structure. While the merger of a foreign company with an Indian company is exempt from capital gains tax in India, the reverse doesn’t enjoy the same treatment. Providing tax neutrality to an outbound merger will go a long way in the ability of Indian companies to raise growth capital,” said Vaibhav Gupta, partner, Dhruva Advisors.

According to Vishwas Panjiar, partner, Nangia Andersen, while outbound mergers have been permitted under regulatory norms, the lack of tax neutrality from capital gains tax in such cases makes them unattractive. “The rationale for not granting tax neutrality is twofold: to discourage outward flow of investment and to levy exit tax on the company/ shareholder,” Panjiar said.