TLDR:
- Karnataka High Court ruling may ease potential service tax burden for private equity and venture capital funds.
- CESTAT previously held that ICICI Econet funds managed investor money like a banking institution, making them liable for service tax.
A recent Karnataka High Court ruling in an appeal filed by ICICI Econet Internet and Technology Fund and others has implications for venture capital funds. The issue stemmed from a decision by the Customs, Excise and Service Tax Appellate Tribunal in 2021, which held that the ICICI Econet funds managed investor money like a banking institution, triggering a service tax liability. The ruling would have affected all pooling vehicles, potentially increasing costs for investors and exposing funds to income tax challenges. However, the Karnataka High Court’s recent ruling stated that VCFs set up as trusts cannot be considered a person for levy of service tax, providing some relief. Despite this, the characterization of the carried interest in the hands of fund managers remains unresolved, leaving the door open for potential GST implications. The tax authorities may choose to appeal the decision in the Supreme Court, impacting the tax treatment of carried interest and potentially making India a less favorable jurisdiction for fund raising and management.
