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Clauses 3(c), 53, 58
1. Introduction
A new type of entity namely
limited liability partnership (hereinafter referred to LLP) has come into
existence by LLP Act, 2008. LLP is an alternate corporate business that offers
the twin benefits of limited liability companies and the flexibility of
partnership firms. Introduction of LLPs in India is a path breaking reform
which is in consonance with the changing environs of the business world. With
the introduction of the LLP Act, 2008 a taxing framework was an essential next
step. This type of entity is already in existence in various countries. In
countries like the USA & UK LLP are treated as a tax transparent entity i.e.
partners are liable to tax for income of LLP. However, the Finance Bill,
proposes to tax the LLP at entity level along the line of general partnership
i.e., LLP shall be liable to tax at the entity level and the share of profits
received by the partners shall be exempt.
2. Amendments
The Finance Bill proposes
following new provisions and amendments to the existing provisions in relation
to LLP:
• By virtue of clause 3(c) of
the Finance Bill, section 2(23)(i) defining “firm” is extended to include LLP
as defined under LLP Act 2008. The term “partner” shall include a partner of a
LLP & the term “partnership” is extended to include LLP.
• By virtue of clause 53 of
the Finance Bill, new clause (cd) under section 140 is introduced – This
section provides that the Return of Income of the LLP shall be signed and
verified by the designated partner.
• In case there is no
designated partner or a designated partner cannot sign the Return of Income,
the same shall be signed by any other partner.
• By Clause 58 of the Finance
Bill, section 167C is introduced. This section makes every partner of a LLP
jointly and severally liable for the taxes to be paid by the LLP for the
period during which he was a partner, unless the non-recovery of taxes cannot
be attributed to gross neglect, misfeasance or breach of duty on his part.
• LLPs have been excluded
from the provisions of presumptive taxation contained in section 44AD of the
Act
Analysis
3. Definition
The term firm is amended to
include LLP as defined under the LLP Act. S. 2(n) of the LLP Act defines LLP
as a partnership formed and registered under this Act. Sec. 2(d) of the LLP
Act defines a ‘body Corporate” and includes LLP incorporated outside India. S.
2(m) defines a foreign LLP to mean a LLP incorporated and registered outside
India and which establishes a place of business in India. Under Chapter XI of
the LLP Act, S. 59 provides that Central Government may make rules for
provisions in relation to establishment of place of business by Foreign LLP
within India. A co-joint reading of the amendment in the definition of ‘firm’
under the Income-tax Act and S. 2(n) read with sections 2(d) & 2(m) it appears
that foreign LLP operating in India shall not be covered by the definition of
firm under the I.T. Act. Hence, there is no provision under the Income Tax
dealing with taxability of foreign LLPs operating in India.
4. Conversion
According to the Memorandum
to Budget, conversion of firm into LLP will have no tax implications if
following two conditions are satisfied:
1. Rights and obligations of
the partners remain the same after conversion, and
2. There is no transfer of
any asset or liability after conversion.
However, there is no
corresponding provision in the Finance Bill to this effect. The proposal in
the Memorandum to the Budget appears to be absurd. As per sections 27(3) and
28(1) of the LLP Act, 2008 partner of LLP is not liable for obligations of LLP
arising in a contract or otherwise and it shall be solely the obligation of
the LLP. Contrary to this, S. 26 of the Indian Partnership Act, 1932 provides
that every partner is liable jointly with all other partners and also
severally for all acts of the firm. Hence, it is statutorily impossible that
the obligations of the partners would remain same after conversion from firm
to LLP. In fact, one of the prime reasons for conversion of firm to LLP is the
limitation of joint and several liability.
Hence, if above proposal is
enacted in the I.T. Act, it would act as a barrier for firms to convert into
LLP. Also, with respect to the condition that there should be no transfer of
any asset or liability after conversion, no time limit for the same is
suggested.
In any event, if the above
two conditions are met, still there is a road block as under clause 7(c) of
Second Schedule to the LLP Act, on conversion of firm to LLP the firm shall be
deemed to be dissolved. Whether such deemed dissolution would be covered by
section 45(4) of the Income-tax Act or whether the conversion of firm into LLP
shall not be considered as a transfer on the lines of conversion of firm into
a company under Chapter IX of the Companies Act, 1956 is still unclear. The
Bombay High Court in CIT vs. Texspin Engg. & Mfg. Works (2003) 263 ITR 345 has
held that in case of conversion of a firm into a company under Part IX of the
Companies Act, 1956 there is no distribution of capital assets and neither S.
45(4) nor 45(1) is applicable. Applying the ratio of the Bombay High Court, it
may be fairly concluded that conversion of firm into LLP would not fall within
the ambit of S. 45.
However, a suitable amendment
in S. 47 is suggested.
Also there is no discussion
about taxability in case of conversion of company into LLP.
5. Amalgamation
Chapter XII of the LLP Act,
2008 provides for compromise, Arrangement or Reconstruction of LLP. Under the
said chapter, S. 62 of the Act provides for Amalgamation of one LLP with
another LLP on terms and conditions as contained in the said section. The
conditions are similar to those contained under the Indian Companies Act, 1956
with respect to amalgamation of companies. Under S. 47 of the I.T. Act,
transfer of capital asset of a company in a scheme of amalgamation is exempt
from capital gains. However, the bill has not introduced any amendment in S.
47 so as to cover scheme of amalgamation of LLP and hence transfer of capital
assets in a scheme of amalgamation of LLP may be regarded as a taxable
transfer.
6. Tax Credit
The practice of taxing the
income of the LLP in the hands of the firm is a divergence from the practice
of treating the LLP as a tax transparent entity in certain other countries
like UK and USA, which tax the income of the LLP in the hands of the partners.
Thus, in case of the income of the LLP is also taxed in other jurisdiction
where the income is taxed in the hands of the partners, the availability of
tax credit to LLP in India might lead to certain difficulties.
7. Stamp Duty
On conversion of firm,
private cos and unlisted cos into LLP, all the properties of the transferor
entity shall be transferred and shall vest in the LLP without further
assurance, act or deed. It may be noted that registration of a firm as a
company under the Companies Act does not require a separate ‘conveyance’ for
vesting of the property. Hence stamp duty may also be not payable in case of
conversion to LLP. However, it is expected that clarity may be provided
regarding stamp duty so that conversions become an easy process.
8. Miscellaneous
The effective rate of tax for
LLPs would be 30.9 per cent which is lower than the rate applicable to
companies; i.e., 33.99 per cent. Further Dividend Distribution tax and MAT
applicable to companies do not apply to LLPs.
9. Conclusion
Section 47 of the Act should
be suitably amended to exempt conversions & amalgamations so that Capital
gains tax is not attracted. LLP is at nascent stage and proper support in the
form of simplified procedures, incentives and a user friendly tax regime will
make it more attractive.
Remuneration to Partners –
Clause 15 – S. 40
According to existing
provisions, payment of remuneration to working partner is allowed as
deduction; professional firm and other firms are treated separately. Clause 15
of the Finance Bill proposes to make upward revision of existing limits of
remuneration on uniform bases as under for both types of firms:
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(i)
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On First 3 lakh of Book profit or loss.
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Rs.1,50,000 or 90% 90whichever is less |
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(ii) |
On Balance |
At 60% |
The Amendment will take
effect from 1-4-2010 (A.Y. 2010-11) onwards.
The above amended provision
will also be applicable to limited liability partnership.
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