Dr. Sanjiv Agarwal

Who says tax policy and tax planning do not go hand in hand. Here is a live example of frequent tax policy change and failed tax planning without any wrong motives. When the concept of limited liability partnerships was introduced in India two years back, it was advocated that LLPs are a better, easier and tax friendly option, compared to corporate entities .

A LLP is typically a business entity which can be called hybrid form of a firm and a company. The Income-Tax Act provides for the same taxation regime for a limited liability partnership as is applicable to a partnership firm. It also provides tax neutrality (subject to fulfillment of certain conditions) to conversion of a private limited company or an unlisted public company into an LLP.

Hitherto, LLPs were being taxed as a partnership firms and not as a corporate entity . Also LLPs are not subject to dividend distribution tax , as LLPs do not declare dividend, there being no shareholders. But Union Budget 2011 has shattered the tax planning thought by various entities while incorporating a new LLP or converting a firm or company into a LLP. A new concept of Alternate Minimum Tax (AMT) is sought to be levied on LLPs as contrast to Minimum Alternate Tax (MAT on companies. This has been done to preserve the tax base vis-à-vis profit linked deductions and to remove arbitrage of tax saving between companies and LLPs.

LLPs shall be subject to alternate minimum tax @ 18.5 percent on the adjusted total income as per the income tax provisions (as against book profit in case of MAT). However LLPs will be able to enjoy credit of AMT to be carried forward for a period of 10 years, though in the first stance, there will be an outgo of 18.5 tax. It may be noted that MAT is also levied @ 18.5 % as the tax rate has been enhanced from 18% to 18.5 % in the budget.

Taxing LLPs now in the form of AMT is only an after thought with a view to garner more revenue. This will prove to be retrogatory for LLP culture which was gradually picking up.  Last fiscal, some of the big business houses also formed LLPs or converted companies into LLP to their advantage accruing from legitimate tax planning. The new tax named alternate minimum tax shall be levied w.e.f.  1 April 2012 and thus shall apply to assessment year 2012-13 and in subsequent years.  However, AMT credit can be availed in ten following years. There will be no AMT levy in assessment year 2011-12.

The concept behind LLPs was to encourage corporate culture in India by creation of LLPs by small or medium business entities, corporatisation of professional and consultancy  firms including chartered accountants, advocates etc so as to bring such professionals  at par with global peers and allow conversion of companies into LLPs  so as to reduce paper work and compliances.

The Budget has also missed the opportunity to announce foreign direct investment (FDI) in LLPs which is waiting since long now. Many foreign investors and entities are waiting for entry through LLP route. A discussion paper was also issued by Government in September 2010 and some announcement was expected in 2011 Budget. This ignorance coupled with AMT will dampen the growth and future prospects of LLPs in India.

It is clear that Government’s intention to bring this amendment is to protect revenue which would otherwise have to be foregone in cases of conversion of companies into LLPs. While it is a jolt to such an idea, it is certainly a discouragement to promotion of corporate culture in India and the very purpose for which LLP Act was legislated.


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September 2021