The Limited Liability Partnership Act, 2008 (LLP) has come into effect in 2009. The LLP has features of both a body corporate as well as a traditional partnership. 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. 

An LLP being treated as a firm for taxation, has the following tax advantages over a company under the Income-tax Act:-

i) it is not subject to Minimum Alternate Tax;

ii) it is not subject to Dividend Distribution Tax (DDT); and

iii) it is not subject to surcharge.

In order to preserve the tax base vis-a-vis profit-linked deductions, it is proposed to insert a new Chapter XII-BA in the Income-tax Act containing special provisions relating to certain limited liability partnerships.

Under the proposed amendment, where the regular income-tax payable for a previous year by a limited liability partnership is less than the alternate minimum tax payable for such previous year, the adjusted total income shall be deemed to be the total income of such limited liability partnership and it shall be liable to pay income-tax on such total income at the rate of eighteen and one-half per cent.

For the purpose of the above,

(i)         “adjusted total income” shall be the total income before giving effect to this newly inserted Chapter XII-BA as increased by the deductions claimed under any section included in Chapter VI-A under the heading “C – Deductions in respect of certain incomes” and deduction claimed under section 10AA;

(ii)        “alternate minimum tax” shall be the amount of tax computed on adjusted total income at a rate of eighteen and one-half per cent; and

(iii) “regular income-tax” shall be the income-tax payable for a previous year by a limited liability partnership on its total income in accordance with the provisions of the Act other than the provisions of this newly inserted Chapter XII-BA.

It is further provided that the credit for tax (tax credit) paid by a limited liability partnership under this newly inserted Chapter XII-BA shall be allowed to the extent of the excess of the alternate minimum tax paid over the regular income-tax. This tax credit shall be allowed to be carried forward up to the tenth assessment year immediately succeeding the assessment year for which such credit becomes allowable. It shall be allowed to be set off for an assessment year in which the regular income-tax exceeds the alternate minimum tax to the extent of the excess of the regular income-tax over the alternate minimum tax.

This amendment is proposed to take effect from 1st April, 2012 and will, accordingly, apply in relation to the assessment year 2012-13 and subsequent years.

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