The Indian government has requested insights from the private equity and venture capital sectors regarding international tax practices for fund managers, particularly concerning the Goods and Services Tax (GST) on carried interest (or “carry”). Unlike advanced markets like the US, UK, and Singapore, which do not impose indirect taxes on carry, India’s tax regime is under scrutiny.
The Supreme Court recently upheld a Karnataka High Court ruling stating that a fund structured as a trust should not be taxed as a person and does not generate profits or provide services. However, the court did not address the GST implications on carry fees directed to fund managers.
If carry is classified as capital gains, it will face a 12.5% tax; if regarded as a performance fee, it would incur an 18% GST and a significant income tax, elevating the tax burden above 40%. The industry seeks a tax framework similar to those in advanced markets to ensure growth and investment continuity in India’s alternative investment funds (AIFs).