Limited liability partnerships (LLPs) have been the flavour of corporate jurists all over the world in the past 15 years. The concept looked attractive. India passed the Limited Liability Partnership Act in 2008, providing the legal framework for the formation of LLPs. The Act came into force on April 1, 2009. The tax aspect has been sorted out by Finance Bill, 2009. LLPs will be taxed in the same way as ordinary partnership firms. The share of the partners in LLPs will be tax-free. Also, definitions of terms such as ‘firm’, ‘partner’ and ‘partnership’ have been amended. Section 40 (b)(v) of the Income-Tax Act, 1961 has also been amended. The remuneration limit to partners is now enhanced. The distinction in this regard between professional firms and other firms has been removed. On the first Rs 3 lakh of the book profit, remuneration will be paid at Rs 1,50,000 or 90 per cent of such profit, whichever is more. On the balance, remuneration will be at 60 per cent. Such remuneration will be taxed in the hands of the partners.
DESIGNATED PARTNERS
The LLP Act provides for nomination of “designated partners” who are saddled with the responsibility for signing the tax return of the LLP. There can be two designated partners, one of whom is a resident of India. Mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners will be governed by mutual agreement. It is obligatory for the LLP to file an annual statement of accounts and solvency with the Registrar. Audit is mandatory except when it is relaxed by the Central Government. Under normal partnership, the partners are liable jointly and severally for all acts of the firm done while they are partners. In the case of an LLP, the partner is not affected by the misconduct of other partners. In a normal partnership, the liability is unlimited, whereas in an LLP the liability of the partner is limited to his contribution. There is no ceiling on the number of partners in an LLP. Section 167 C of the I-T Act renders every partner of an LLP liable for tax to the extent not recoverable from the LLP. The memorandum explaining the provisions of the Finance Bill declares that the conversion from a general partnership firm to LLP will have no tax implications if the rights and obligations of the partners remain the same even after conversion and if there is no transfer of any asset or liability after conversion.
CLARITY NEEDED
There is, however, no clarity on the payment of stamp duty. In the past 15 years, the device of converting firms into a limited company under Part IX of the Companies Act has been resorted to. The courts have held that there is no transfer on such conversion and stamp duty is not payable. This also applies to the levy of capital gains. Probably Section 47 of the Act should be amended to exempt conversion into LLPs from levy of capital gains tax. The Central Board of Direct Taxes (CBDT) should also explain how losses of the existing partnerships will be carried forward on conversion. Advantage to the LLP arises from the withdrawal of the 10 per cent surcharge. LLP will not attract Minimum Alternative Tax (MAT) and Dividend Distribution Tax (DDT). The UK, Singapore and Germany have given pass- through status to LLPs. Attractive alternative In the past 10 years, India’s tax structure has been moving towards a system when the form of business organisation will not affect the tax status. The retention of corporate surcharge in this year’s Budget has made the non-corporate entities look attractive from the tax point of view. LLPs provide an alternative corporate business vehicle offering the twin benefits of limited liability of companies and the flexibility of partnership firms. LLPs will be more attractive for the services sector, professionals, small and medium enterprises and venture capital funds. The Government has put in place an e-governance system to provide services envisaged in the LLP Act in a record three months. This is probably the first legislation to be implemented in electronic mode from the beginning. E-filing is supported by digital signature certificate to ensure the legal validity of the documents. LLP fee payments can be made electronically through credit cards. Much remains to be done by way of follow-up to the amendments made by the Finance Bill, 2009. The High Courts of Andhra Pradesh, Calcutta and Bombay have uniformly taken the view that stamp duty is not payable when a firm is converted into a company under Part IX of the Companies Act. The CBDT, however, has not accepted this principle. A special leave petition (SLP) has been filed in the Supreme Court against the ruling in the Texspin Engg and Manufacturing Works (263 ITR 345) case. Probably the SLP can be withdrawn. The CBDT has to help in making the new venture of LLPs a success.
