Mumbai: Indian Private Equity and Venture Capital Association (IVCA), which represents venture capital (VC) and private equity (PE) firms in India, has requested the finance ministry to reduce goods and services tax (GST) on management fee earned by onshore funds. The body has sought reduction of GST rate from 18% at present to 5%, a top official said.
The formal representation was made on 21 May by IVCA representatives, seeking a more benign tax regime for India-based alternate investment funds (AIFs). “ While there is tax pass-through available for direct tax, the indirect tax regime is leading to high friction cost for domestic AIFs. On an average, the management fee charged is around 2%. A GST rate of 18% on the fee earned is too high,” Padmanabh Sinha, chairman, IVCA told Mint. He further said its members are unanimous on the demand for lower tax rate.
At present, AIFs who have based their offices and fund managers offshore do not have to pay any GST as it is a destination-based tax.
“Domestic firms face an unfair tax regime as compared to their offshore peers despite having majority of the commitment from overseas investors for their funds. We have made a representation to reduce the GST rate to 5%. Reduction of GST will encourage more funds to choose India as their domicile,” Sinha said adding that some of the leading economies offer tax rebates or sops to the AIFs. IVCA also been seeking tax rebate from the government but that would require changes in the law.
The head of a leading domestic PE firm on condition of anonymity said even though the advisors and the entire “value chain” of overseas funds are based out of India, they enjoy tax exemptions. Value chain includes services like due diligence and valuation services among others. “Paying taxes is never an issue. However, such a high rate of tax for onshore funds will ensure most of them shift to other countries which levy much lower tax than what is prevailing in India right now,” he said.
Sinha said the representative body has also suggested that the indirect tax be levied based on the destination of limited partners or investors. “The returns to offshore LPs can be exempted whereas the returns delivered to domestic LPs can be taxed as per the GST rate applicable.”