The Hindu Business Line : Tax treatment for LLP on lines of partnership firms

New Delhi, July 8 A limited liability partnership (LLP) will be taxed on the same lines as partnership firms — this would mean taxation of profit in the hands of the entity; the partners will be exempted.

Ending the period of uncertainty on how a LLP will be treated for taxation purposes, the Finance Bill, 2009 states that “it is proposed to incorporate the taxation scheme of LLPs in the Income Tax Act on the same lines as the taxation scheme currently prevalent for general partnerships”.

The Bill further proposes to make the amendments effective from April 1, 2010, for assessment year 2010-11.

A LLP is an alternative corporate business vehicle that allows professionals such as chartered accountants, lawyers, and enterprises engaged in the information technology sector, science and technology sector, and venture capital business among others to create commercially efficient vehicles for providing business and services of high quality.

Says Ms Shefali Goradia, Partner, BMR Advisors: “While the expectation was that the LLPs will be made fully tax transparent, as is the practice in most other countries, the clarity on taxation of profits at LLP level will be helpful.

"As no surcharge is applicable to firms and LLPs, the effective rate of tax for LLPs will be 30.9 per cent. As this is lower than the rate of tax on companies, LLPs will become an attractive option for setting up new ventures.”

Provisions of the act

The LLP Act provides for nomination of ‘designated partners’ who have been given greater responsibility.

It has been proposed in the Finance Bill that the designated partner shall sign the Income Tax returns of an LLP, or, where for any unavoidable reason such designated partner is not able to sign the return or where there is no designated partner as such, any partner shall sign the return.

In case of liquidation of an LLP, the Finance Bill proposes that every partner will be jointly and severely liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part.

As an LLP and a general partnership are being treated as equivalent (except for recovery purposes) in the Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion.

If there is a violation of these conditions, the provisions of Section 45 of the Act will apply.

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