Quick Summary
Recently, the Indian government has requested private equity and venture capital industry to explain how other countries tax fund managers, particularly in relation to the application of GST to 'carry earnings' that are part of the share of profits fund managers and key employees. This subject, which has been topical in the recent period, can potentially affect the development and functioning of AIFs in India. International Analysis of the Taxation of Carried Interest Currently, none of the de
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FAQ :
'Carry income', also known as carried interest, is the share of profits earned by fund managers and key employees from the investments made by an Alternative Investment Fund (AIF).
The primary concern is the potential application of Goods and Services Tax (GST) to 'carry income', which could significantly increase the tax burden on fund managers.
In countries like the US, UK, and Singapore, 'carry income' is typically taxed as capital gains rather than being subject to indirect taxes like GST or VAT.
A Supreme Court decision upheld a ruling that trusts set up for funds are not 'persons' under tax law, reinforcing that AIFs are pass-through entities and not liable for GST on their own operations.
If classified as a performance fee for services, 'carry income' could attract an 18% GST and up to 30% income tax, leading to an overall tax burden exceeding 40%.
The AIF industry hopes that India will follow international norms by taxing carried interest as capital gains, providing a clear and favourable tax structure to encourage growth and attract talent.
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