Govt working on tax breather for overseas investors in AIFS
The government is evaluating ways to bring down high taxes on foreign investors that pool money in alternative investment funds (AIFS) 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 passed on to the investors.
In the past there have been requests for remission or reduction in rates for 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.
The 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 venture capital/private equity fund located in an offshore jurisdiction, are exempt from GST.
However, India-domiciled AIFS, managed by Indian fund managers, are supposed to pay GST 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 avail itself of input tax credit.
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 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 a zero-rated supply, and GST is not levied on such exports.
“Eighteen per cent GST on a fund management fee of 3 per cent translates into 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, tax partner at EY India.
Way out
Bhandari said it would be best to give services rendered by fund managers to India-based AIFS having foreign investors full zero-rated status. Another way out would be for the government to allow deemed export status and let the fund manager get a refund on the GST paid, depending on the amount 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 say this ratio can be applied to determine the fund management fees attributable to foreign investors and the fund manager can then seek a refund on the tax paid on this amount.
The commitments raised by AIFS as of March 31, 2021, amounted to ~4.51 trillion. Of this, ~3.56 trillion, or 79 per cent, came from category II funds, which include private equity funds, real estate funds, and funds for distressed assets.