GST and AIFs: A Hidden Cost That Demands Attention

 In India’s evolving regulatory landscape, Alternative Investment Funds (AIFs)—the go-to vehicle for high-net-worth individuals, institutions, and private equity players—are facing increasing scrutiny under the Goods and Services Tax (GST) regime. While fund managers often focus on returns and compliance with SEBI regulations, GST implications are frequently underestimated, leading to overlooked costs and potential regulatory pitfalls.

Here’s a concise breakdown of the key GST exposures and what every fund manager, advisor, and investor should know:

1. Management and Advisory Fees – Subject to 18% GST

Fees charged by fund managers or advisors to the AIF are squarely taxable at 18% GST.

Industry Insight: While most funds charge GST correctly, it's essential that contracts and documentation clearly distinguish taxable service fees from capital contributions. Ambiguity here can lead to compliance risks.

 2. Carried Interest – Typically Outside the GST Net

If properly structured, carried interest—viewed as a profit share rather than a service fee—falls outside the ambit of GST. Since it doesn't constitute consideration for services, it's generally exempt.

Caution: The structure, documentation, and timing of carry payouts must be watertight. Inadequate paperwork can expose the fund to reclassification risk, particularly during audits.

 3. Input Tax Credit (ITC) – Not Available

Since AIFs typically do not supply taxable outputs, input GST paid on services such as legal, audit, custodian, or trustee services cannot be claimed as credit.

This makes GST a direct cost to the fund, affecting overall returns and reducing investor IRR.

 4. GST Registration – Growing Regulatory Focus

With the introduction of Section 7(1)(aa) (treating member-to-entity transactions as ‘supply’), many AIFs have received show cause or registration notices, indicating a broader shift in regulatory interpretation, particularly for trust-based structures.

Action Point: AIFs—especially those with cross-border elements or multiple investors—should proactively review their registration status and GST classification.

 5. IFSC AIFs – Structuring for GST Efficiency

AIFs established in International Financial Services Centres (IFSCs) can benefit from a more favourable GST regime. Services to or from SEZ units may qualify for exemption or zero-rating, subject to certain conditions—translating into significant cost savings and enhanced competitiveness.

 Why This Matters Now

GST is no longer just a compliance checkbox—it’s a material cost component. Missteps or oversights can lead to penalties, investor concerns, and performance drag. For fund managers, the message is clear: address GST issues upfront to protect fund economics and maintain investor trust.

 Final Word

In today’s high-performance, high-compliance environment, AIFs must align their GST strategy with operational and legal realities. Ignoring it could mean sacrificing returns, credibility, and peace of mind. It’s not just about taxation—it’s about preserving value and staying ahead of regulatory curves.