PE/VC investors push for dividend tax code

Mumbai / Bengaluru Top industry executives said private investors will press the recently formed Committee of Experts on Private Equity and Venture Capital to formalize a private equity dividend tax law later this month, even as there are calls for a management fee to be made The funds are deductible expenses under capital gains. .

Venture capital and venture capital firms typically charge their investors a 2% annual management fee, and take 20% of the fund’s earnings after the base return threshold is met. This share of fund profits, which is paid to fund managers as an incentive, is known as “portable” and has emerged as one of the sticking points between fund managers and tax administration.

“There should be a definition of ‘carrying’ somewhere in the tax code. Currently, Gopal Srinivasan, Senior Board Member of Industry body IVCA (Indian Private Equity and Venture Capital Association), founder and president of PE TVS Capital said, There is no definition, and that leaves room for discretion.”

Currently, fund managers end up paying taxes either as a capital gain or as a service tax under the Goods and Services Tax (GST) system, depending on how the assessment is conducted by the tax officials.

Investors expect that the expert panel chaired by former SIBI Chairman M. Damodaran handling issue, along with other demands. Last Tuesday, the Finance Ministry said the commission, which was first announced in the budget earlier this year, will identify ways to accelerate the growth of the IP/Venture Capital ecosystem.

There are many aspects of the tax framework applicable to funds that can be clarified. Taxes (direct and indirect) on interest transferred is one of the major issues which will have an impact on fundraising in motor vehicle resident in India. Subramaniam Krishnan, partner at EY, said several fund managers are currently dealing with inquiries in this regard.

Tax notifications for PE and VC companies gained particular pace after July 2021, when the Bangalore Board of Customs, Taxes and Services Appeals Tribunal (CESTAT) said service tax on the transferred interest distributed by PE and VC funds was justified. This was a case involving ICICI Venture’s ICICI Econet and Internet Technology Fund, which is now subject to appeal. Investors are seeking two more changes around the tax on the 2% annual management fee charged by fund managers. Currently, a Goods and Services Tax (GST) is levied on management fees paid to the fund for managing foreign capital. Fund managers want to compromise on this.

“The rationale is that if advisory services were to be provided directly to foreign investors, it would likely qualify as ‘service export’ and not be liable for GST,” said Kunal Shah, partner at PwC.

Second, investors want to allow management fees as a tax deduction from capital gains.

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