Economic Survey 2022-23: Indian start-ups exploring reverse-flipping

Source: The post is based on the article “Economic Survey 2022-23: Indian start-ups exploring reverse-flipping” published in The Hindu on 1st February 2023.

What is the News?

According to the Economic Survey 2022-23, the Indian startup ecosystem is facing several challenges despite recording an increase in the number of startups to 84,012 in 2022 from 452 in 2016.

What are the key highlights from the Economic Survey on Indian startups?

Startup Ecosystem in India: India ranks among the largest start-up ecosystems in the world, with about 48% of young companies in the country being from tier II and III cities.

The Department for Promotion of Industry and Internal Trade(DPIIT) has recognised that startups have created more than 900,000 direct jobs.

The government has also strengthened its intellectual property rights regime by modernizing the IP office, reducing legal compliances, and facilitating IP filing for start-ups, women entrepreneurs, small industries and others. This has resulted in a 46% in the domestic filing of patents between 2016 and 2021.

According to the Global Innovation Index 2022 Report, India has entered the top 40 innovating countries for the first time in 2022, by improving its rank from 81 in 2015 to 40 last year.

What are the challenges faced by startups in India?

Flipping: Many start-ups have been headquartered overseas, especially in destinations with favourable legal environments and taxation policies, technically known as ‘flipping’.

Flipping refers to the process of transferring the entire ownership of an Indian company to an overseas entity, including the transfer of all Intellectual Property and data owned by the Indian company. Typically, flipping happens at the early stage of the startup.

However, several Indian start-ups are now exploring ‘reverse flipping’ or shifting their domicile back to India.

Other Challenges: The survey pointed out several other challenges start-ups face such as funding hurdles, revenue generation struggles, lack of easy access to supportive infrastructure and a complex regulatory tax environment.

What are the recommendations given by the Economic Survey on Indian startups?

The survey has suggested measures such as 1) simplifying multiple tax layers, 2) resolving uncertainty due to tax litigation, especially of employee stock ownership plans, 3) exploring the incubation and funding landscape for start-ups in emerging fields like social innovation and impact investment, 4) facilitating mentorship programmes through partnerships with established private entities and 5) simplifying the process for the grant of an ‘inter ministerial board’ certification for start-ups.