The Government of India has introduced the Taxation (Amendment) Ordinance 2019 on the 20th of September 2019. Several tax beneficiary amendments are introduce through this ordinance.

Such as corporate tax rate cut for domestic companies @ 22% (Section 115BAA) and new tax rate of 15% Section 115BAB has introduce for manufacturing companies. Also, the MAT rate has been reduced from the current 18.5% to 15%.

After theses amendments many firms are converting into company for taking the benefit of new tax rate.

No Capital Gain:

The Gujarat High Court (HC) had held in the taxpayer’s case that conversion of a firm into a company was not a transfer (even before section 47(xiii) was introduced) and would not be subject to capital gains tax.

1. Governing Laws, Rules, Regulation for Conversion of Partnership firm Into Company

i. Section 366 of Companies Act, 2013

ii. Companies (Authorised to register) Rules, 2014

iii. Section 47(XIII) of Income Tax Act, 1961

iv. State’s Stamp Notification.

2. Prerequisite Formalities or Conversion of Partnership firm Into Company

i. Firm Registration Certificate.

ii. Amend Partnership deed – Add clause of conversion in partnership deed, if required.

iii. Written consent or No Objection Certificate from all the secured creditors.

iv. Written consent from the majority of Partners.

v. Twenty one days clear advertisement in Form No. URC. 2 which shall be published in a newspaper in English and in any vernacular language.

vi. Filling of Form URC-2 with ROF.

vii. Two or more partners, earlier it was seven. The requirement of seven partners has been done away by The Companies (Amendment) act, 2017 (Amendment Effective from 05.07.2018) .

viii. Statement of accounts prepared not later than fifteen days preceding the date of seeking registration and certified by the Auditor.

ix. A copy of the latest income tax return.

x. No revaluation of the assets of the Partnership firm in the preceding three financial years.

3. Form To be filled for Conversion of firm into Company

a. Form URC-1

b. Spice-32

c. Spice-33

d. Spice-34

e. Form-AGILE

4. Process for Conversion of Partnership firm Into Company

a. First Step:

1. Hold a meeting of the partners to take assent of majority of partners, authorize one or more partners to take all steps necessary.

2. Written consent or No Objection Certificate from all the secured creditors.

  • Partnership firm have to apply for Avaibility of the Name in RUN.

1. Twenty one days clear advertisement in Form No. URC 2 which shall be published in a newspaper in English and in any vernacular language.

2. Amend Partnership deed – Add clause of conversion in partnership deed, if required.

3. Filling of Form URC-2 with ROF. Statement of accounts, prepared not later than fifteen days preceding the date of seeking registration and certified by the Auditor.

  • Agreement by the partners to convert the partnership.

b. Second Step:

List of Documents required filing with Roc:-

c. Form URC-1

i. A list showing the names, addresses, and occupations of all partners with details of capital contribution.

ii. List of first directors along with, passport number, if any, with expiry date, residential addresses and their interests in other firm or body corporate.

  • Consent to act as Director in Form DIR-2

1. Partnership Deed, Supplementary Deed and Firm Registration Certificate.

2. Written consent or No Objection Certificate from all the secured creditors.

3. Written consent of majority of Partners.

  • Undertaking that the proposed directors shall comply with the requirements of the Indian Stamp Act, 1899.
  • List of members and directors duly verified by two or more proposed directors declaration.

1. Certificate from a CA/CS/CWA certifying the compliance with all the provisions of Stamp Act 1899.

2. Copy of the latest income tax return of the partnership firm.

3. A copy of the notice Form URC-2, as published and the copy of the notice served to Registrar of Firms along with proof of service.

  • No objection certificate from the concerned Registrar of Firms.
  • Affidavit from all the partners for dissolution of the firm.
  • Statement of accounts, prepared not later than fifteen days preceding the date of seeking registration and certified by the Auditor.

1. Statement of pending proceedings, if any, by or against the partnership firm.

d. Form Spice-32

1. INC-9 Declaration by first subscriber(s) and director(s).

2. DIR-2 declaration from first Directors along with Copy of Proof of Identity and residential address.

  • Rent agreement/NOC from the owner of the property.

1. Proof of Office address.

2. Copy of the utility bills

e. Form Spice-33

Memorandum of Association of the Company

f. Form Spice-34

Article of Association of the Company

g. Form-AGILE

For GSTIN, EPFO and ESIC Registration (if required)

  • Thrid Step

1. Intimation to ROF

Acknowledge to registrar of firm with in fifteen days from the date of registration.

5. Analysis of Tax Benefit from Conversion of Partnership firm Into Company

Section 115BAB – Corporate tax rate for new manufacturing companies (If Total income is exceeding Rs. 1 Crore)
Business Status Partnership Firm Company Difference
Tax Rate 30% 15% 15%
Surcharge 12% 10% 2%
Health and Education Cess 4% 4% 0%
Effective Tax rate 34.94% 17.17% 17.78%

Section 115BAA – New tax rate for domestic companies not carrying Manu. Activities (If Total income is exceeding Rs. 1 Crore)
Business Status Partnership Firm Company Difference
Tax Rate 30% 22% 8%
Surcharge 12% 10% 2%
Health and Education Cess 4% 4% 0%
Effective Tax rate 34.94% 25.17% 9.77%

6. Is it possible Merger of Partnership Firms under Companies Act, 2013?

M/s. Kediya Ceramics (NCLT Ahemdabad) CA(CAA) No. 95/NCLT/AHM/2017

In view of the aforesaid judgement, a partnership firm can participate in a scheme of amalgamation only after converting itself into a company under section 366 of the Companies Act, 2013.

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