The recent CESTAT Bangalore ruling in ICICI Econet and Internet Technology Fund [TS-290-CESTAT-2021-ST] that ‘carried interest’ – which is a fund share of profits from managing investors money- is a ‘performance fee’ that would attract service tax has as left Indian fund managers in dire straits over what awaits them next.
The decision, if not overturned, would adversely impact every Venture Capital Fund (VCF) or any other investment pooling fund set up as a trust. It confirms the demand of Service tax (on the amount withheld by the Appellant Trusts out of the gains of portfolio investments) on expenditure such as payments to AMC, Custodian, R&T agent, brokers, selling agents employed by the Trusts through their Trustees.
Moreover, it also treats ‘Carried Interest’ as a payment in nature of performance fee payable to an AMC towards rendition of services instead of return of investment.
ELP’s Gopal Mundra and Ginita Bodani in their article for Taxsutra, do a threadbare analysis of the ruling and discuss the implications of the judgment for funds.
Read the article here: Click here