The Hindu Business Line : Why a liberal tax regime for LLPs?

There is no justification in exempting LLPs from income-tax when firms under the Partnership Act and companies under the Companies Act are being taxed at flat rates.

T. N. Pandey

The Bill concerning Limited Liability Partnership (LLP) was tabled in the Rajya Sabha on December 12, 2006, by the Minister of Company Affairs. The statement of objects and reasons of the Bill shows that LLP has been conceived of “as an alternative corporate business vehicle that provides the benefits of limited liability to its members but allows them the flexibility of organising their internal structure as partnership based on mutually arrived agreement.”

It has been said that the LLP form would enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements.

Owing to flexibility in it structure and operation, the LLP would also be a suitable vehicle for small enterprises and for investment by venture capital.

Objectives ignored

The desired objectives seem to have been forgotten while drafting the Bill. The Bill is, in essence, a mini form of the Companies Act, 1956 and most of the regulatory provisions of the Companies Act have been made applicable to LLPs, making a farce of “flexibility and lesser regulation”.

LLPs have been brought under the control of the Registrar of Companies (RoC), and important definitions in the Bill have been adopted from the Companies Act. The National Company Law Tribunal, having jurisdiction over companies under the Companies Act, shall have jurisdiction over LLPs also.

LLPs, like companies, shall have perpetual succession. And, like companies which get ‘Certificate of Incorporation’, LLPs will have to obtain ‘Incorporation Document’.

As in the case of companies, which have to use the word “Limited” after their names, LLPs will have to affix ‘LLP’ after their names. Requirements concerning filing of documents with the RoC are almost the same as in the case of companies. All provisions concerning ‘investigation’, as contained in Sections 235 to 246 of the Companies Act, have been incorporated in the LLP Bill also (Clauses 42 to 53).

The partners of LLPs shall have separate legal entity different from LLPs as in the case of members vis-À-vis companies. The Indian Partnership Act, 1932 does not apply to LLPs.

Like public companies, there is no restriction in the number of members in an LLP.

Taxability of LLP

It has been nearly two years since the LLP Bill was introduced, but it is yet to be passed by Parliament. However, in the meantime, considerable lobbying is being done to ensure that such bodies are made income-tax exempt and only partners be taxed.

According to a news report the Ministry of Corporate Affairs has written to the Finance Ministry that LLPs be allowed to chose whether the tax would be paid by the firm or by the partners. Another reason given for the need for a liberal tax regime is that LLPs are meant for professionals and being a new form of business for them, they need to be given concessional treatment.

By and large, tax policies are determined by certain principles — one of these being ‘capacity to pay’. Obviously, professionals have better capacity to pay tax than ordinary retailers, small businessmen, etc., who form general partnerships. It would be anomalous to make their firms pay tax at a fixed rate of 33.90 per cent (with surcharge and education cess) and not to subject LLPs to any tax.

Naresh Chandra panel

The Naresh Chandra Committee’s recommendation regarding taxation of LLP does not seem to be in tune with the scheme of taxation of similar other tax units. It has stated that “LLPs should be governed by a taxation regime that taxes the partners as individuals, rather than taxing the LLP itself, i.e., the LLPs should be treated in the same manner as the firm under the tax laws.”

The recommendation is contrary to the system of taxation of firms under the I-T Act. At present, under the I-T law, a partnership firm pays tax on its profits after deduction of business expenditure, salaries and interest to partners.

Partners are then taxed on their salary and interest, whereas their shares in the profits in the firms are exempt. Firms, thus, are not exempt from tax.

There is no justification in exempting LLPs from income-tax when firms under the Partnership Act and companies under the Companies Act are being taxed at flat rates.

(The author is a former Chairman of CBDT. blfeedback@thehindu.co.in)

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