A year ago when a new law allowed Indian businessmen to form limited liability partnerships (LLPs), corporate houses felt it would be an easy way to escape tax. But today, many are running into a wall. And, the resistance is coming from an unlikely quarter: the Reserve Bank of India (RBI).
Even though the LLP Act is intended to give smaller businesses and entities like law firms, and accountancy partnerships a flexible business structure followed in many countries, there is nothing in the law that stops big businesses from rejigging their holding and investment companies into LLPs which are spared of dividend distribution tax and minimum alternative tax, or MAT. Thus, the amount of dividend a holding company would eventually pass on to the promoter would be higher if the holding or investment company is converted into an LLP.
But, corporates planning to convert their holding companies into LLPs have been told by the registrar of companies (ROC) to get a no-objection certificate (NOC) from RBI; and the central bank is unwilling to give one. “There is a concern that the moment a company becomes LLP, it will be out of the RBI radar. These companies are core investment companies and under new rules they will be monitored, like non-banking finance companies (NBFCs), by the regulator,” said an RBI official.
Recently, RBI has come out with new rules to monitor group holding companies and investment firms – a move that has not gone down well in Corporate India. Under the new regulatory regime, these entities will have to get themselves registered with RBI, fulfill certain criteria and share information on a regular basis.
However, a few large corporates have found a way out to put in place an LLP structure by claiming that their holding entities have other transactions and cannot be categorised as NBFCs. “The RBI has been reluctant to grant no objection to investment holding LLPs which has prompted many promoters to set up LLPs as investment-cum-operating entities. LLPs continue to remain attractive considering the tax advantage they enjoy in terms of exemption from MAT and Dividend Distribution Tax,” said Shefali Goradia, partner at the law and consultancy firm BMR Advisors.
There is a growing feeling that an NOC from the banking regulator will need changes in the law. According to Punit Shah, executive director – tax and regulatory services (financial services) at KPMG, “Using LLP structure is regulatory compliant and tax efficient way of holding investments. But the LLP law as such does not prohibit the investment/holding activity by a LLP and hence any such move will require amendment in the LLP law.”
