The $100 billion world of venture capital and private equity in India is being targeted by the goods and services tax (GST) office. The tax administration has lately sent letters to about twelve of these alternative investment funds (AIFs), raising concerns about why their schemes—which house the fund pools—are not GST registered.
Each year, these funds collect enormous sums of money to support thousands of start-ups and publicly traded businesses.
Discussion with CBIC, Finmin
The Central Board of Indirect Taxes & Customs (CBIC), the highest authority that levies and collects GST, seems to desire more control and visibility over these fund entities in light of the skyrocketing assets under the management of AIFs.
Nonetheless, the fund sector is attempting to convey that schemes and funds don't offer any kind of "service," and that their profits are exempt from GST. The fund management provides the "service" in an AIF, where the funds act as vehicles for pooling investor capital. The capital gains and interest streams of the AIF funds are exempt from GST.
AIFs, which are privately pooled vehicles formed in India and governed by the Securities and Exchange Board of India (Sebi), gather money from astute investors and allocate it according to a predetermined investment objective. AIFs reach sophisticated investors who are willing to contribute at least Rs 1 crore and who are searching for returns from startups and early-stage enterprises, in contrast to mutual funds, which are frequently the preferred vehicle for equity exposure for small investors.
Generally, AIFs are set up as trusts that have Sebi registrations. A trust may have more than one AIF, and each AIF may have several schemes, with asset management companies overseeing the funds.
Different viewpoint
"GST is paid by the asset management on the fees it gets from the fund. However, the GST department has a different perspective. It seems sense that the funds are worried about the notifications," a source in the business told ET. "The sector has taken up the matter with the CBIC as well as the finance ministry, hoping that some clarity would come in the budget," stated the chairman of the fund.
Generally, the service provider is responsible for paying the GST regardless of whether they are able to recoup the tax from the service recipient. Nonetheless, in some circumstances—referred to as "reverse charges"—the recipient of the service assumes responsibility for paying the tax. A fund may now be required to pay GST if specific costs are incurred as a result of receiving services that are listed as reverse charges.
A few years ago, the venture capital business encountered indirect tax authorities for the first time on another issue. A tribunal determined in 2021 that a fund's portion of earnings from managing investors' capital, known as the "carried interest" or "carry" in trade jargon, is a "performance fee" that is subject to service tax.
