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Richa Mishra
K. R. Srivats

New Delhi, June 29 A limited liability partnership (LLP) is likely to be treated in the same way as a partnership firm for taxation purposes. The Finance Bill is expected to address the contentious issue of tax treatment for LLPs.

Currently, the Limited Liability Partnership Act, 2008 is silent on the issue, and the matter is before the Finance Ministry.

The first LLP was registered in April and since then 50 more have been registered in the country, mainly from the professional services category.

The LLP is an alternative corporate business vehicle that not only gives benefits of limited liability but also allows its members the flexibility of organising their internal structure as a partnership based on an agreement.

This corporate format allows professionals such as chartered accountants, lawyers, and enterprises engaged in information technology and science and technology sectors, and venture capital business to create commercially efficient vehicles for providing services of high quality.

If the taxation regime for LLPs is put on the same footing as partnership firms, such entities will have to pay tax on all their profits. However, salaries paid by an LLP to its partners would be taxable in the hands of the partners.

This proposal would, however, be in contrast to the demands of the Institute of Chartered Accountants of India (ICAI) which is keen that LLP profits when distributed among the partners be taxed in the hands of the partners; otherwise the firm should be taxed on the profits retained by it.

Official sources told Business Line, “We are expecting that the Finance Bill will address the issue. The Ministry for Corporate Affairs (MCA) had left it to the Finance Ministry to take a final call on the subject.”

While declining to comment on what kind of tax regime is likely to be proposed for such entities, the sources said, “The regime should be such that it makes LLP an attractive body, as the success of such a concept would depend to a large extent on it being a tax-efficient structure.”

The Corporate Affairs Ministry and the Standing Committee on Finance had considered three options available internationally for taxing such entities. These are either to tax LLPs as a company. Adopt the pass through concept — where individual partners are taxed and not the firm. Or, the third concept followed in the US where it is left up to the firm to decide on how it wants to be taxed — as a company or by the pass-through method.

More Stories on : Corporate | Taxation | Company Law

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