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The Indian Private Equity & Venture Capital Association (IVCA) sees the existing 18 per cent GST on ‘fund management fees’ of PE funds as a “big tax friction” affecting the onshoring of fund management activity in India.
The thorny issue is that no input tax credit is available for the fund, which has to fork out the GST. Ultimately, the burden is borne by the investors in the fund.
The industry body plans to soon approach the Finance Ministry and the GST Council, asking them to consider the concept of ‘deemed exports’ even for services, IVCA Chairman Padmanabh Sinha told BusinessLine .
Sinha said the IVCA will make a case for expanding the scope of ‘deemed exports’ specified under the CGST and SGST laws to include the supply of services to alternative investment funds (AIFs).
“Even for fund management fees, the concept of deemed exports should be introduced” he said.
Any GST relief could help spur fund management activity within India as all the billings (from consultants, fund management, legal fees) which happen to the offshore pooled account will start being done domestically, Sinha said. “The government will benefit from that as more activity happens here. The 18 per cent GST rate is a big friction for activity within India. I know several funds which will move to India if this hurdle goes away.”
Sinha explained that AIFs managed by India-domiciled asset managers face 18 per cent GST now on the ‘fund management fee’ paid to these managers.
However, pure offshore funds which pool capital from foreign investors at an offshore location in order to invest in India do not pay any such GST.
AIFs, even if they pool the same overseas dollars inside India, enjoy no GST exemption. The IVCA wants the scope of Section 147 of the CGST and SGST Acts enhanced to cover ‘deemed exports’ even for services.
Section 147 empowers to government to notify certain supplies of goods as deemed exports. Currently, it provides deemed exports status only for the supply of goods where the goods do not leave India, and payment is received in the rupee or convertible foreign exchange.
The past three years have seen steady growth in PE activity in India, observed Sinha. “Growth has been sustainable and enduring; no frothiness, only a steady build-up. Even in the first six months of this year, the PE/VC deal activity has been good,” he said.
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