Llp Mantra Vol V 07 Sep2009

1. LLP MANTRA
A Publication by Corporate Professionals - {Y-01).{V-05)
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2. Insight
Part ic ulars Page N o.
R egular Sec tion – T ax As pect of LLP 3-6
F AQ’S – T ax at ion of LLP 7-8
LLP in N ews 9-10
T ax ation Segm ent on Global C om paris on 11
Gary I s s ues 11
R ec ent Queries on LLP C lub 12
Public Opi nion 12
Our Of f erings 13
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3. Regular Section
Taxation aspect of Limited Liability Partnership
The Budget 2009-10 has introduced the provisions regarding taxation aspect of the newly
introduced form of business Limited Liability Partnership.
As per the Budget 2009-10, LLP will be treated as Partnership firms for the purpose of Income
Tax and will be taxed like a partnership firm.
Change in Definition of Firm, Partner & Partnership
The Budget 2009-10 has amended the definition of Firm and Partners in the following manner:
a. Firms shall have the meaning assigned to it in the India Partnership Act 1932 and shall
include a limited liability Partnership as defined in the Limited Liability Partnership Act
2008.
b. Partner shall have the meaning assigned to it in the Indian Partnership Act 1932 and
shall include
• Any person, being a minor, has been admitted to the benefits of partnership;
• A partner of a limited liability partnership as defined in the Limited Liability Partnership
Act 2008.
c. Partnership shall have the meaning assigned to it in the India Partnership Act 1932 and
shall include a limited liability partnership as defined in the Limited Liability Partnership
Act 2008.
Tax rate:
30% flat tax rate + 3% education cess
No Minimum Alternate Tax & Dividend Distribution Tax
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4. Eligibility (section 184):
In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to
satisfy the following criteria
 The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.
 The individual shares of the partners are very clearly specified in the deed.
 A certified copy of LLP Agreement must accompany the return of income of the LLP of
the previous year in which the partnership was formed.
 If during a previous year, a change takes place in the constitution of the LLP or in the
profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be
submitted along with the return of income of the previous years in question.
 There should not be any failure on the part of the LLP while attending to notices given by
the Income Tax Officer for completion of the assessment of the LLP.
Steps for Computation of taxable income of a LLP:-
 Find out the firms income under the different heads of income, ignoring the prescribed
exemptions. The heads of income are:-
o Income from House Property
o Profits and Gains of Business or Profession
o Capital Gains
o Income from other sources including interest on securities, winnings from
lotteries, races, puzzles, etc. ('Salary' income head is not included)
 The payment of remuneration and interest to partners is deductible if conditions of
section 184 and section 40(b) of the Income Tax Act are satisfied. Any salary, bonus,
commission or remuneration which is due to or received by partners is allowed as a
deduction from income of the partnership firm and the same is taxable in the hands of
partners.
 Make adjustments on account of brought forward losses/ disallowances of interests,
salary, etc paid by firm to its partners. The total income so obtained is the "gross total
income".
 From the "gross total income", make the prescribed deductions and the balancing
amount is the "net income" of the LLP.
Signing of Income tax Return:
The designated partner shall be responsible for signing the income tax return of LLP, where for
unavoidable reasons, such designated partner is not able to sign the same or where there is no
designated partner, any partner will sign the return.
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5. Tax Comparison Chart
In case of Income of Rs. 1 Lakh
Particulars Companies Partnership Firms LLP Foreign Companies
Amount in Tax 30900 30900 30900 41200
(in Rs.)
In case of Income of Rs. 1.10 Crore
Particulars Companies Partnership Firms LLP Foreign Companies
Amount in Tax 37,38,900 33,99,000 33,99,000 46,45,300
(in Rs.)
On Dividend/Profit Distribution of Rs. 1 Lakh
Particulars Companies Partnership Firms LLP Foreign Companies
Amount in Tax 16,995 Nil Nil N.A.
(in Rs.)
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6. In case MAT is applicable and Book Profits is Rs. 1 Lakh
Particulars Companies Partnership Firms LLP Foreign Companies
Amount in Tax 15,450 Nil Nil 15,450
In case MAT is applicable and Book Profits is Rs. 1.10 Crore
Particulars Companies Partnership Firms LLP Foreign Companies
Amount in Tax 18,69,450 Nil Nil 17,41,987
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7. FAQ’S - Taxation
What is the tax treatment being provided for LLPs?
The Union Budget 2009-10 has introduced the tax provisions for LLP. According to it, LLP will
be treated as Partnership firm for the purpose of tax and therefore will be taxed on the line of
partnership firm.
Who will be responsible for signing the Income tax return?
The designated partner shall be responsible for signing the income tax return of LLP, where for
unavoidable reasons, such designated partner is not able to sign the same or where there is no
designated partner, any partner can sign the return.
Whether interest on contribution is allowed under LLP? If yes, whether deduction of such
interest would be allowed to LLP?
Yes, interest on contribution is allowed but the same should be allowed under the LLP
Agreement. However the deduction against such interest can be availed by LLP from its taxable
income only if conditions of section 184 and section 40(b) of the Income Tax Act are satisfied.
Whether is there any limit on payment of remuneration to partners?
No, LLP Act 2008 has not prescribed any limitation/ restriction on the payment of remuneration
to partners but the same should be provided under the LLP Agreement.
However the Income Tax Act prescribes the maximum limit up to which the deduction to the
LLPs for such remuneration is allowed against its taxable income.
On First Rs 3,00,000 of book profit or in Rs 1,50,000 or at the rate of 90% of the book-
case of loss profit, whichever is more
On the balance of book profit At the rate of 60%
The LLP can also pay remuneration beyond the aforesaid limit but the remuneration in excess
of the limit will not be allowed as deduction against the taxable income.
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8. Whether MAT or Dividend Distribution tax will be applicable on LLP?
LLPs are in the same parlance as partnership firms so far tax provisions are concerned and
therefore Minimum Alternate Tax and Dividend Distribution Tax will not be applicable for LLP.
What is passing through taxation system?
In countries like Singapore, UK, the income of LLP is not taxable in the hands of the LLP rather
than it is taxed in the hands of partner to the extent of the profit distributed, this system of
taxation is known as passing through taxation. Under this system, instead of taxing the LLP, its
partners are taxed.
What will be the treatment of remuneration in the hands of the partners under Income
Tax?
Remuneration to partners will be treated as their Income from Business & Profession and will be
taxed accordingly. This also gives them the opportunity to undertake the necessary tax planning
in respect of their remuneration from the LLP.
Whether the benefits of MAT can be carried over post conversion of company into LLP?
Provisions of MAT are applicable only to company & not to LLP and therefore in absence of
corresponding provision in regard to carrying over the benefits of MAT under the Income Tax
Act, LLP can enjoy the same post conversion.
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9. LLP in News
Foreign investment policy for LLP firms under review.
The government has decided to clarify the foreign investment rules under the new limited
liability partnership (LLP) framework. An official confirmed to FE that the ministry of corporate
affairs has urged the department of industrial policy & promotion to work out the necessary
guidelines as foreign investors are asking for clarity. The haste follows clearance of the tax
treatment for LLPs in Budget 2009-10.
Taxing LLPs at entity level a dampener for PE, VC Companies.
Introduction of LLP on 1st of April this year raises a hope for PEs and VCs to have an alternative
of trust route as vehicle for funds to pass through the tax at the entity level. But the budget
announcement regarding the taxing of LLPs at the entity level has created some
disappointment. It could also give rise to the issues pertaining to application of tax treaties and
availability of tax credit to the foreign partners. The problems regarding the treatment of losses
at the hands of the Partners may also wipe up. The industry would like an option for taxation at
the entity or Individual level.
LLP on a par with general Partnerships.
Much awaited announcement since the LLPs are not recognized by the Income tax Act. The
LLPs should be subjected to the same taxation scheme as prevalent for the general partnership
which means that LLPs would be taxed, but the Partners would be exempted.
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10. Tax Treatment of LLPs: Was the Budget a Let – Down?
Mr. Mr. Anurag Goel, Secretary, Ministry of Corporate Affairs illuminating the features and tax
aspects of Limited Liability Partnership Act, the very first Indian Act implemented in the
electronic mode from the very beginning, said that LLPs are placed in the parlance of
Partnership Firms as far as tax provisions are concerned and further making LLPs a preferred
business model, the conversion from Partnership Firm to an LLP could have no tax obligations
subject to the conditions of same rights and obligations of the Partners and no transfer of assets
or liability after conversion. With these benefits Ministry is hoping this LLP to be best Corporate
Structure for the professionals, service industry and SMEs.
On the another side of the coin Mr. N.K Jain, Secretary, ICSI, highlighting the tax reforms in
India, which are underway to bench mark the global practices, hoped for the taxation system of
LLP to be so devised to provide flexibility through the Pass through system as prevalent in
other parts of the world like UK, Singapore, Germany wherein the profits are allocated to
partners for tax purposes. That could encourage the entrepreneurs to set up LLPs and would
make this new model a success in India. Further to make the conversion process simplified and
easier, clarity to be provided by the government regarding the stamp duty issues.
To check out the complete articles click here
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11. Global Scenario of LLP Taxation
Facts LLP UK Singapore LLP USA LLP Indian LLP
Tax Status of Pass through Pass through system is Pass through system LLPs would be
LLP system is prevailing prevailing in UK. LLP is prevailing. LLP taxable in the
in UK. LLP pays no pays no tax but its pays no tax but its same parlance of
tax but its partners partners pay tax in partners pay tax in Partnership. LLP
pay tax in relation relation to the income or relation to the income would be liable
to the income or gains they receive or gains they receive for the payment
gains they receive through the LLP. through the LLP. of Tax instead of
through the LLP. Partners.
Gray Issue
As per the LLP Act 2008, LLP Agreement is the charter document of the LLP, the importance of this
agreement can be ascertained by the fact, that the LLP Act gives the partners complete freedom to have terms
and conditions in the Agreement, which can override the provisions of the Act. The LLP Agreement defines the
business to carried on, rights, duties of the partner vis-à-vis other partners and in respect to the LLP like power
to borrow, enter into contracts, how the LLP will be run and managed etc. Every third party dealing with any
LLP, has to rely on the LLP Agreement, in order to be aware of the powers of each partner and extent of their
dealing with third party. In case of companies, Memorandum of Association defines the scope of business of
the Company and in case of LLP, it would be LLP Agreement. But unlike Memorandum of Association, LLP
Agreement is not public document within the meaning of section 36 of the LLP Act, which deals with document
available for public inspection.
The non-availability of LLP Agreement as public document will restrict the rights of third party dealing with the
LLP and could be the reason for various disputes in future.
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12. Recent queries on LLP Club
How do distributions get made in an LLP, whether the same be credited to the Partners
account or can be carried in the reserves of the LL?.
What to do with the profits in the companies in 2009-10 whether to carry forward in LLP
and then use to minimize DDT?
whether TDS applicable to LLP themselves & if company made any consultancy
payment to LLP whether company deduct TDS if yes than what rate
Whether the profits be taxed in the hands of Partner?
Are there any succession provisions under the tax laws for creating an LLP/ What about
implications under other laws such as stamp duty, VAT etc.
Whether an advocate can form an LLP?
Whether benefits of MAT can be carry forwarded post LLP conversion?
To check out the replies or to rejoin the queries click here
Public opinion
Our Poll of the week “Whether LLP should be allowed to merge with Company” was
favored by 63% audience while 25% audience was against the merger of LLP with Companies
and in between these 13% audience remains constant for any decision.
To count your vote on “Whether registration of charge like companies should be made
mandatory for LLPs?” log in to www.LLPonline.in.
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13. Our Services
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14. Our Team
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Disclaimer:
This paper is a copyright of Corporate Professionals (India) Pvt. Ltd. The entire contents of this paper
have been developed on the basis of Limited Liability Partnership Act 2008. The author and the company
expressly disclaim all and any liability to any person who has read this paper, or otherwise, in respect of
anything, and of consequences of anything done, or omitted to be done by any such person in reliance
upon the contents of this paper.
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