Posted on

38% of India’s Unicorns Are Not “Indian”

India currently has 90 unicorns – startup companies that are valued at over $1b – and will likely soon have 100 unicorns, becoming the third such country after the USA and China. Since January 2016 when the “Startup India” program was launched, the startup ecosystem of India including infrastructure for startups, be it incubators, mentorship, funding, corporate initiatives, media coverage, or even patent filing, has improved substantially making life easier for entrepreneurs. 

However, it is still not as smooth a ride for the Indian start-ups as it is for startups in the advanced economies of say, the USA, Singapore, and China. Our “ease of doing business” is yet to be on par with the developed world, especially given the high taxation, onerous compliance requirements, inadequate and cumbersome legal protection of IP, as well as time-consuming and expensive processes to access capital and secure exits. It isn’t a surprise therefore that many companies are shifting their primary legal location to foreign jurisdictions like the USA, and Singapore. 

How do the numbers stand?

As per a study by Venture Intelligence, of the presently known 90 “Indian” unicorns), 56 are based in India, 25 in the USA, 8 in Singapore, and 1 in the Netherlands spanning sectors from e-Commerce to fintech to gaming and more. In other words,  38% of “Indian” unicorns are not quite Indian as they are domiciled outside of India. Moreover, these 34 unicorns have raised approximately $30B ie, this large money could have been but hasn’t been invested into an India domiciled entity. 

Sector Wise break-up of the Unicorns 

Source: Venture Intelligence

Chart: Sector-wise domicile of unicorns as on 31st March 2022.

The reasons for incorporating in the USA are different from incorporating in say,  Singapore. SaaS founders find it easier to reach out to the large market for SaaS “Software as a Service” based offerings in the USA by incorporating there. Companies incorporated in Singapore for high “ease of doing business”, low taxation, quality infrastructure, and quality of life while remaining close to India.  

Out of 12 Indian unicorns in the SaaS category, all except Zoho and Darwinbox are based in the USA. SaaS offerings are expected to be a $1 trillion opportunity and India will lose wealth creation, tax revenues, listing, and related income, by not having these companies domiciled in India. 

Of the three unicorns in a frontier technology area like Artificial Intelligence, namely – Glance, Fractal, and Mindtickle, one is registered in Singapore while the other two are in the USA. Of the 3 unicorns in Gaming, Mobile Premier League and  Dream 11 are based in Singapore and New Jersey respectively while Games 24×7 is registered in India. 

Flipkart, India’s greatest startup success story and the poster boy for Indian e-commerce, which was acquired by Walmart at a valuation of over $20B, was domiciled in Singapore.  That set the trend of e-commerce companies having their HQs in the island country. There are many Singapore shell companies set up by VC funds to become holding companies for Indian subsidiaries. Singapore is today the hottest destination for the registration of Indian e-commerce players.

Even more worrying than this trend of registering the parent company outside India is the migration of startup founders to UAE and Singapore.  Lower taxes, easier access to capital, government support, simple compliance, and better quality of life while being just a short flight away from India make the UAE and Singapore rather attractive to founders. 

Whichever country our startups chose to register or our founders chose to migrate to, the ultimate loser is India with intellectual property ownership and funds being vested in non-Indian jurisdictions. 

Stay in India Mission

In order to retain the economic value added by the start-up ecosystem, it is important that India urgently puts in place policies that ensure that founders and startups ‘Stay-in-India”.  This will require the coming together of various ministries, particularly DPIIT/Min of Commerce, Ministry of Finance, Ministry of Electronics and Information Technology, and regulators like the Reserve Bank of India and Securities and Exchange Board of India to address the Stay-in-India Checklist. 

Stay-in-India is an evolving checklist of issues that need to be solved to contain the exodus of startups from India. These issues fall under four categories: a) Ease of doing business and making it easy to raise funds; b) harmonization of coding of digital economy c) Reducing overall tax anomalies and d) Increased DTA and foreign markets access. 

The issues are comprehensively listed in the Stay-in-India checklist. 

As an example, let’s consider the anomalies in the taxation of dividends. Dividend received from overseas subsidiaries, that has been already taxed, is taxed once again in India as income in the hands of the company. Also, while the rate of tax on such dividends for certain companies is 15% (as against 30%), the same exemption is not provided to limited-liability partnerships and individuals. It amounts to double taxation of income and discourages a model where overseas subsidiaries of Indian startups can pay dividends at lower tax rates to Indian shareholders. Removal of this dividend tax will directly encourage start-ups to remain domiciled in India and receive dividend income from subsidiaries abroad. 

Similarly, there are regulatory frictions e.g. TDS on the sale of software products which reduces the working capital in hands of Software product companies, or the need for filling the Softex form (which was relevant in the early days of IT services exports), and which is now redundant as GSTN Invoices already have the required and sufficient data. All that is required is for different departments of the Govt and regulators to connect digitally and share information. The unfavourable tax regime for IPR protection, such as subjection to minimum alternate tax, IPRs being subject to income tax, and not capital gains even when they are held for more than a year is another big irritant. Technology-heavy startups, therefore, tend to relocate to jurisdictions like Singapore and the USA that have a smoother and lower-cost approach. Founders relocating to overseas jurisdictions are typically seen around the time of M&A. One of the reasons relates to taxation: typically, a portion of the financial proceeds arising from an M&A transaction is held in escrow and released to the founders after some time and/or completion of certain contractual obligations. The escrow payments are treated as income by the Indian tax authorities rather than capital gains as other jurisdictions do – this needs resolution.

India is emerging as a global startup hub, with the support of the Govt, with our startups attracting capital and talent while being at the forefront of innovation, jobs, wealth, and intellectual property creation. Brand India is enhanced globally by the success of Indian startups.  With more support from the Government by way of removal of regulatory friction and by providing incentives – fiscal and regulatory –  the ecosystem required to create, enable and grow Indian startups will dramatically accelerate. 

The Ease of Doing Business must be tackled in mission mode with the Stay-in-India Mission (SIIM) being an integral part of India is to secure its rightful place around the global innovation table. 

The blog post is co-authored by our volunteers Sanjay Anandram and Amit Agrahari. You can reach out to Amit at [email protected]

Disclaimer: The article depends upon various pubic data sources apart from credible data sources that are relevant at the current date and time. Readers may like to read this accordingly. 

Data Sources Courtesy: 1. Venture Intelligence. 2. Invest India

Posted on

How to Incorporate in the USA: US Inc. as a Subsidiary – v2.0

Setting up your headquarters in the US and a subsidiary in India is a tested model. Here’s a blog post by Girish Mathrubootham – founder of Freshdesk, very clearly articulating the process.

Well then, what’s this all about?

The setup we follow at Kissflow is the model in reverse.

Kissflow is headquartered in India, with a subsidiary in the US.

I couldn’t find much information on this model, and thought this might be something worth considering as an option for lots of startups that operate from India. This is not a post on the pros and cons of setting up your headquarters in the USA. That is a complex question and calls for another blog by itself.

This model gives you the option to retain the Intellectual Property (IP) outside of USA and still take advantage of the flexibility that comes with having a US Delaware C-Corp entity.

Also, you will be paying income taxes in line with income in both the countries. In the other model where the HQ is in the US and the subsidiary in India, you may set up the subsidiary as a service company with a transfer pricing model that requires you to have a profit margin of 12% to 15% in line with the services industry. And you will be paying 30% taxes, in the case of India, on that “perceived profit”.

So, here is an alternate model for your consideration that is compliant with the laws of the land in both the countries of operation.

The basics of setting up a company in the US remain the same:

1. Incorporating in USA as a Delaware, C-Corp.

You don’t have to be present in the USA for the incorporation. Instead, you can use one of the many service providers.

Here are a few recommended ones:

The cost for this would be approximately $1000, but you can pick and choose packages depending on the services you would require. I would highly recommend that you complete the entire documentation at a stretch including the formation documents, share allocation, etc.

Leaving out some of these may seem cheaper initially but might hurt you in the long run. So complete the entire procedure as part of the incorporation package to get the basic setup done right. You know what they say about being penny wise and …

2. Getting an EIN

This is similar to the Social Security Number. Each business has a unique tax ID number called Employer Identification Number that you will have to register for.

Ask for this service to be included as part of your incorporation, or, with your legal firm’s guidance complete this step immediately. Having an EIN is essential to deal with banks and pretty much everything else in the USA.

3. Getting a US Address

To receive business documents, it is mandatory that you have a US Address.

You can use a service like virtualpostmail.com which starts at $20 each month to collect the receipt of letters via emails; they scan and upload documents for your review and also ship them to any part of the world, if required, for an additional cost.

Besides this utility, it also serves as your local billing address for your credit/debit cards, etc., which becomes essential when you start paying for services with a US bank account.

We use Regus for this service. They provide a bunch of secretarial services including physical mail scanning and emailing among others. You can choose a package that is appropriate for your business. It is very important for your finance/admin team in India to know if there are any statutory mails from the government, bank, etc. and a service like Regus helps you achieve that.

4. Getting a US Bank Account

You would require a bank that allows remote processing of account opening and operations. We use the services of Chase Bank. Silicon Valley Bank (svb.com) is also an alternative, but requires a reference and a minimum balance of 25k USD. Chase Bank doesn’t have any minimum balance requirement.

Before applying for a bank account, it’s mandatory you have an EIN.

5. Getting a Merchant Account / Payment Gateway

Apply for a Stripe or Braintree account. The fee may be on the higher side, but the increased transparency in pricing, support, and the ease of doing business with them makes up for it.

6. Acquiring a Business Credit Card

It is harder to get a regular business credit card without building a credit history. You can use the debit card for all transactions to start with, until you have enough money in bank to get a secure credit card.

A secure credit card is nothing but a credit card with a spend limit secured by the money in your bank account / deposit.

7. Getting a US Phone Number

You can get a toll free number from any of the service providers like phone.com, Google Voice, or Skype.

That was a quick checklist of things you need to get started with the US company.

Once you have your company set up in the US, here’s how the relationship between the two companies (your Indian HQ and the US subsidiary) would work:

1. Distributor License

Make your US company the exclusive worldwide master distributor of your SaaS product. Set up a distributor license agreement that assigns an exclusive license to the US company, to host and sell your products in the USA. The Indian entity now holds the entire Intellectual Property (IP), by providing a hosting and distribution license to US companies for a 20% price cut per customer. If you look at it, 20% margin is a fair market value even if you had to engage a third party for this service.  Also, the US company has to cover all its expenses related to hosting, sales & marketing, and other operations.

2. Terms of Service

The terms of service of your website and product has to be owned by the US entity, as a distributor of your software. Preferably, all the legal recourse should be made available with your US entity.

3. Earnings and transfer of money

If you are just starting up, my best wishes to you for ramping up your revenue faster. 🙂

You can retain 20% of the revenue earned by the US entity and transfer 80% of the revenue back to your parent company as license fee.

When you start making enough money, you will be liable to pay taxes on the profit made on the 20% margin after all the operational costs are subtracted. Note that you will be paying other taxes such as franchise tax, State tax, etc., which have to be paid anyway to operate a company regardless of whether or not you make profits.

That’s pretty much it.

Statutory warning: As mentioned earlier, do not consider this as legal advice. Just sharing an alternate model than following the traditional model of US HQ. You should definitely consult a lawyer and an accountant to ensure that you stay compliant with all the laws in all the countries that you operate in.

Good luck with your startup and feel free to drop a note to suresh-at-kissflow.com to say “Hello”.

This blog was first published on the ChargeBee blog.