Tax authorities bowl a GST googly to AIFs
Mumbai, July 13, 2024
Synopsis
About a dozen such alternative investment funds (AIFs) have recently received notices, with the revenue department questioning why their schemes, housing the fund pools, are not registered under GST. These funds raise huge money every year and bankroll thousands of startups and listed companies.
India's $100-billion private equity and venture capital world is in the crosshairs of the goods and services tax (GST) office.
About a dozen such alternative investment funds (AIFs) have recently received notices, with the revenue department questioning why their schemes, housing the fund pools, are not registered under GST.
These funds raise huge money every year and bankroll thousands of startups and listed companies.
Matter Taken Up with CBIC, Finmin
Amid spiralling assets under management of AIFs, the apex body, the Central Board of Indirect Taxes & Customs (CBIC), which levies and collects GST, it appears, wants to have a better grip and visibility on these fund entities.
The fund industry, however, is trying to put across the point that the schemes or the funds do not provide any 'service' and their earnings do not attract GST. In an AIF, the 'service' is provided by the fund manager - with the funds serving as pooling vehicles for the money received from investors - while the earning streams of AIF funds (interest and capital gains) are not subjected to GST.
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Regulated by the Securities and Exchange Board of India (Sebi), AIFs are privately pooled vehicles incorporated in India, collecting funds from savvy investors for deploying the money in line with a defined investment policy. Unlike mutual funds, often the small investors' preferred vehicle for equity exposure, AIFs tap sophisticated investors who are ready to chip in at least Rs 1 crore and looking for upsides from startups and early-stage ventures.
AIFs are typically organised under trusts which are registered with the Sebi. A trust can have more than one AIF, and under each AIF there can be multiple schemes while the funds are managed by asset management entities.
Different view
"The asset manager pays GST on the fees it receives from the fund. But the GST department is taking a different view. Understandably, the funds are concerned about the notices," an industry person 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," said a fund head.
The GST is normally paid by the supplier of the service irrespective of whether it is in a position to recover the tax from the receiver of the service. However, in certain cases, which are termed as 'reverse charge', the liability to pay the tax shifts to the receiver of the service. Now, if a fund has certain expenses borne for having received services falling under the reverse charge list, it may have to pay GST.
The VC industry had its first brush with indirect tax authorities on a separate matter some years ago. In 2021, a tribunal had ruled the 'carried interest' - or 'carry' in trade parlance, which is a fund's share of profits from managing investors' money - is a 'performance fee' that would attract service tax.
[The Economic Times]
