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Tax sword hangs over PE-VC funds after tribunal ruling: report

Economic Times  

Money managers of PE-VC funds in India are rattled by a tax tribunal ruling, which if upheld by higher courts, could more than double the tax on the fund manager. The Customs, Excise & Service Tax Appellate Tribunal, Bengaluru, has ruled that 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 ruling, which went against the appellant ICICI Econet Internet and Technology Fund, a VCF registered with Sebi, could impact the entire industry. Funds treat carry as ‘capital gains', which attract a tax of 20% as VCFs primarily invest in unlisted companies. But, if it's treated as a ‘performance fee' for a ‘service' provided by the manager, it would mean an outgo of 18% GST, and full income tax of over 30% on the balance amount — taking the overall tax on the manager to more than 40%.