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Limited Liability Partnerships (LLP) were introduced with the objective to overcome the inherent limitations of partnership firms – blended with features of the “company” form of business structure. It was envisaged that the LLP model will soon gain immense popularity; however, there are some practical (and largely tax) challenges that need to be addressed in order to make LLPs the go-to structure for businesses.

With budget festivities around the corner, India Inc. is looking forward to some amendments related to LLP structure, a wish list for which is as follows:

1. Tax neutral conversion of Company into LLP:In order to encourage LLP structures, the tax neutral conversion of a company into a LLP is an imperative. The extant provisions provide for tax neutral conversion if, inter alia, the turnover and the total book value of assets in the three years preceding the year of conversion is less than INR 60 lakhs and INR 5 crores, respectively. Clearly, the current tax provisions support conversions of only very small/ nascent businesses.

Corporates keen on conversion, exceeding the turnover/ asset criteria, are at a loss with respect to the potential tax implications arising on conversion into LLP, especially in the absence of specific guidance. One may recall the principle laid down by the Hon’ble Bombay High Court in the case of Tex spin Engineering that conversion of one form of legal entity into another does not result into transfer of a capital asset, as it is a mere transmission. Hence, on first principles, the question of taxing a conversion should not arise. In addition, there are no substantive provisions for taxation of shareholders in such situations. In all fairness, given the principles laid down by the Hon’ble Bombay High Court, every conversion should be made tax neutral.

2. Carryover of losses on conversion: Loss making companies having assets/ turnover more than the prescribed limits are not in a position to migrate to LLP flawlessly owing to this ambiguity on conversion related tax implications, including the ability to carryover the tax losses to converted LLP. Changes in the legal structure from company to LLP would ease the compliance burden and facilitate smooth decision making. An amendment to permit tax neutral conversion by such stressed companies into LLPs will go a long way in reviving such businesses.

3. Continuity of Minimum Alternate Tax (MAT) credit: Currently, the tax law neither provides for continuity of MAT credit on conversion of a company into a LLP nor permits the carryover of Alternate Minimum Tax (AMT) credit on conversion of LLPs/ partnerships into company. This could be an unnecessary value loss (in terms of direct impact on valuation) for start-ups that were originally organized as LLPs/ partnerships and had to convert into companies to raise growth capital from financial/ strategic investors.

4. Mergers/ Demergers between LLPs and companies: With ever changing business dynamics, M&A activities have become indispensable. Expansion and inorganic growth opportunities should not be obstructed owing to the absence of provisions in the tax laws to facilitate tax neutral reorganisation between LLPs and companies. Just like tax neutral mergers/ demergers of companies, similar provisions should be introduced for mergers/ demergers of LLPs inter-seas well as with companies.

5 Aligning the tax rates with small companies:The Finance Act, 2017 gave relief to small companies by bringing down the corporate tax rate to 25% if the turnover/ gross receipts in Financial Year 2015-16 did not exceed INR 50 crores. While this was a welcome provision, strangely, LLPs were left out in the cold. Therefore, aligning the tax rate for LLPs would be a welcome move.

Tax reforms of similar nature would improve India’s overall “doing business” ranking and fuel foreign direct investments in the country, which in turn will increase economic activity and employment opportunities.

The views are personal to the authors.

Authored by: Hemal Uchat, M&A Tax Partner, PwC India,  Vijay Bhutada, Director – M&A Tax, PwC India,  Jayant Mehta, Manager – M&A Tax, PwC India

Hemal Uchat, M&A Tax Partner, PwC India, Vijay Bhutada, Director - M&A Tax, PwC India, Jayant Mehta, Manager - M&A Tax, PwC India


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July 2024