The government may exempt partnership firms and limited companies from paying stamp duty while converting into limited liability partnerships (LLPs), a way of doing business that is favoured globally for its flexibility.
The government will amend the Income Tax Act later this year to provide a tax regime for LLPs, which are being incorporated from the beginning of this month, a finance ministry official said.
In an LLP, one partner or shareholder will not be held liable for the slips or wrongdoing of another. Besides, partners will have the freedom to decide the internal structure of an LLP, unlike in the case of companies that have a board of directors and need to follow procedures set by the law.
The idea is to adopt a provision similar to Section 394 of the Companies Act, which allows high courts to waive off stamp duty while approving amalgamations and restructuring of companies involving transfer of assets, the official said, requesting anonymity. Under this section, high courts almost always free asset transfers arising from reconstructions and amalgamations from stamp duty.
“Tax neutrality is essential for the conversion of companies and partnership firms into LLPs,” said a corporate affairs ministry official, who asked not to be named. The proposed move will effectively address the difficulties in getting stamp duty exemptions from state governments.
The finance ministry, however, may insist that the shareholding pattern of the company or the partnership firm from which assets are transferred to an LLP, and the shareholding of the receiving LLP be the same. “This is important to prevent any stamp duty evasion on asset sale or transfer under the garb of conversion to LLPs,” said the finance ministry official.
Once the assets and liabilities of a partnership firm or a limited company are transferred to an LLP, the original entity will be dissolved and removed from government records.
Protection from any liability arising from another partner’s misconduct is essential for investors and professionals who do not know each other to come together and launch a business. In the case of ordinary partnerships, mutual trust is a factor that holds the business together.