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Govt mulling ways to ease tax burden on foreign AIF investors
Such investors have had to bear higher taxes on their investment because of the goods and services tax (GST) borne by such funds, which is ultimately passed on to the investors
The government is evaluating ways to bring down the burden of higher taxes on foreign investors that pool money in alternative investment funds (AIFs) that are domiciled in India.
Such investors have had to bear higher taxes on their investment because of the goods and services tax (GST) borne by such funds, which is ultimately passed on to the investors.
In the past there have been requests for remission or reduction of rates applicable to such funds. Now, the Indian Private Equity and Venture Capital Association (IVCA) has written to the Central Board of Indirect Taxes and Customs, requesting an extension of deemed export status for fund management services rendered to onshore AIFs, said people in the know.
Crux of the matter
Investment management fees constitute 2-3 per cent of the value of the assets managed in an AIF per year. The fees charged to a VC/PE fund located in an offshore jurisdiction are exempt from GST.
However, India-domiciled AIFs managed by Indian fund managers are considered taxable for GST purposes, even if they pool the same overseas money. Since an AIF is only a pooling vehicle for investments and does not provide any service, there is no output GST liability, and it is not able to utilize input tax credit of GST.
Thus, the incremental tax of 18 per cent becomes an additional cost for the foreign investors in the AIF, who would otherwise have been entitled to an export/zero-rated status and wouldn't have to pay taxes on the management fees paid, said experts.
The export of goods or services is considered as a zero-rated supply, and GST is not levied on such exports.
"Eighteen per cent GST on fund management fee of 3 per cent translates to 0.5 per cent of the assets under management, which makes it that much less attractive for foreign investors to create a pooling vehicle in India and may prompt them to look to other jurisdictions such as Singapore which offers remission or exemption from GST," said Smita Bhandari, partner, indirect tax services, EY India.
Way out
Bhandari believes it would be best to give services rendered by fund managers to India-based AIFs having foreign investors the full zero-rated status. Another way out would be for the government to allow for a deemed exports status and let the fund manager get a refund on the GST paid depending on the quantum of foreign investment in the fund.
For fund managers providing services to the AIF and to the extent it constitutes a foreign investment, the IVCA wants fund management services to be treated as deemed exports under section 147 of the Central Goods and Services Act, 2017 read with section 2(39).
Deemed exports mean such supplies of goods as may be notified under section 147. The government may notify certain supplies of goods as deemed exports subject to specified conditions.
Current Sebi regulations mandate AIFs to make a quarterly declaration regarding the constitution of foreign and domestic holdings in the fund. Experts believe that this ratio can be applied to determine the fund management fees attributable to foreign investors and the fund manager can then seek refund on the tax paid on this amount.
The commitments raised by AIFs as of March 31, 2021 amounted to Rs 4.51 trillion. Of this, Rs 3.56 trillion, or 79 per cent of the commitments came from category II funds that include private equity funds, real estate funds and funds for distressed assets.
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