Should AIFs be registered under GST?

Recently it was reported that about a dozen alternative investment funds (AIF) have received notices from the revenue department questioning why their schemes, housing pools of monies contributed by investors, are not registered under GST. This raises two fundamental questions. Who is required to be registered under the Central Goods and Services Tax Act, 2017 (CGST Act)? Should an AIF registered with and regulated by the Securities and Exchange Board of India (SEBI) be registered under the CGST Act or any State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act?’

Section 22 of the CGST Act states that every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees.

Section 2(52) of the CGST Act defines “goods” to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

Section 2(102) of the CGST Act defines “services” to mean anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. The explanation to Section 2(102) of the CGST Act clarifies that the expression “services” includes facilitating or arranging transactions in securities.

Under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (SEBI AIF Regulations) and under the IFSCA (Fund Management) Regulations, 2022 (IFSCA FM Regulations), an AIF may be set up as a company, a limited liability partnership (LLP) or a trust. An overwhelming number of AIFs in India under the SEBI AIF Regulations are set up in the form of a private trust. A few have been set up in the form of an LLP and only one AIF in India has been set up as a company. This is primarily because companies are subject to a number of regulations under the Companies Act, 2013 and are also tax-inefficient. A trust is, at the other end of the spectrum and is easy to maintain. Further, many internal documents of companies and even LLPs have to be filed with the Registrar of Companies and some of them can be accessed by the public. In GIFT City too, the bulk of the AIFs have been set up as trusts. Therefore, it may be assumed that the recent notices issued by the revenue department have been issued to AIFs set up in the form of a trust.

Is an AIF set up in the form of a trust required to be registered under the CGST Act or any state or Union Territory GST Act? A trust is not a legal entity by itself and is represented by a trustee. All AIFs which are in the form of a trust are managed by professional trustee companies. They also have investment managers who are appointed by the trustees and to whom the trustee usually delegates the bulk of the task of running the AIF, including the job of raising funds, making investment decisions, deploying funds and exiting from investments. Investment managers of AIF (called Fund Management Entities under the  IFSCA FM Regulations) are usually registered for GST since they render services to the AIF and receive pre-agreed investment management fees as well as performance fees if they generate returns exceeding a pre-agreed threshold (usually called the hurdle rate). Investments made by the investment manager using the funds of the AIFs are held by custodians as required by SEBI AIF Regulations.

It may be argued that a trust represents its beneficiaries or investors and is a collective union of its beneficiaries or investors. A trust does not have an existence that is outside its investors. Therefore, it may be said that a trust does not render any service to anyone and does not have to be registered for GST. However, this argument that is based on “mutuality of interest” no longer holds water after the insertion of Section 7(1)(aa) in the CGST Act. This new provision which was inserted in the CGST Act in order to nullify the Hon’ble Supreme Court’s judgment in State of West Bengal v. Calcutta Club Ltd[1], states that the expression “supply” includes the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

However, it is important to not lose sight of the fundamental principle that under GST laws, what is taxed is the ‘supply’ of either ‘goods’ or ‘services’ or ‘both’, and it is only a “supplier” who is required to obtain GST registration under law. Given the fact that both definitions specifically carve-out ‘securities’, an issue of units by an AIF, pursuant to a drawdown notice, cannot be considered to be a “supply” of either “goods” or “services”.

This unresolved issue discussed in this note is vital and will have a serious impact on the future of the AIF industry. If AIFs have to be registered for GST, it would affect the profitability and future of the AIF industry.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com

Niraj Hande, Associate Partner – Email – nirajhande@elp-in.com

Milan Soni, Senior Associate, Email – milansoni@elp-in.com

[1] 2019-TIOL-449-SC-ST-LB