Assignment of profits of AIF from fund to Investment Manager

[Bhavesh Suthar]

A is a sponsor as well as Investment Manager (IM) of AIF (Alternate Investment Fund) upto Aug' 2023. The sponsor is the initial capital contributor and further investments are made by other investors. Profits from redemption of units shall be divided between the sponsor and investors. From Aug' 2023, the IM was changed from A to B (sponsor being unchanged i.e. A). Now 100% profits from redemption of units (carried interest) shall be transferred from the Fund to the new IM i.e. B . B also receives fixed management fees from the Fund irrespective of the performance of the Fund. Will this transfer of profits attract GST, being a return on investment. Since distribution of carried interest is dependent on performance of Fund, can it be construed as 'actionable claim'.

AI Summary

Carried interest taxation: performance-linked profit shares treated as taxable consideration for fund management services; GST applies.
Carried interest that is performance-linked and not attributable to an identifiable capital contribution by the Investment Manager is taxable under GST as consideration for fund management services rather than a return on investment or an actionable claim. Routing the carried interest through the Sponsor by assignment does not alter its taxable character; substance over form applies. The IM should issue tax invoices for carried interest, remit applicable GST, and document the service basis and calculations in the IM agreement and assignment documentation.