TLDR:
- The Karnataka High Court ruled that service tax will not be levied on investment management exercises undertaken by venture capital trusts, providing significant tax relief.
- The court held that trusts do not make a profit or provide a service, acting as a ‘pass-through’ vehicle.
In a recent ruling by the Karnataka High Court, venture capital funds have received significant tax relief as the court held that service tax will not be levied on investment management activities conducted by these funds. The court made this decision in response to a plea filed by ICICI Econet Internet & Technology Fund and other venture capital funds against the tax department. The court overturned the decision of the CESTAT, emphasizing that the trusts do not generate profits or provide services. Instead, they act as a ‘pass through’ vehicle where funds from contributors are consolidated and invested by the investment manager.
Furthermore, the court noted that the Finance Act does not recognize a ‘trust’ as a legal person and therefore cannot be charged with a service tax levy. The ruling also applied the doctrine of mutuality, highlighting that contributors/investors and the trust cannot be seen as separate entities as the investments are held in trust and managed by the fund’s investment manager.
While this ruling is a relief for fund managers, it may have financial implications for the government. An appeal to the apex court is expected, and it remains to be seen how this decision will impact the current GST framework. Experts have pointed out that the ruling’s perspective on trusts not being separate entities and the application of the mutuality principle might pose challenges under GST legislation.
