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Key Highlights:
  • LLP’s will be treated as Partnership Firms for the purpose of Income Tax w.e.f assessment year 2010-11
  • No surcharge will be levied on income tax.
  • Profit will be taxed in the hands of the LLP and not in the hands of the partners.
  • Minimum Alternate Tax and Dividend Distribution Tax will not be applicable for LLP.
  • Remuneration to partners will be taxed as “Income from Business & Profession”.
  • No capital gain on conversion of partnership firms into LLP.
  • Designated Partners will be liable to sign and file the Income Tax return.
  • LLP shall not be eligible for presumptive taxation.
  • Capital Gain on conversion of Company into LLP will be exempt from tax, if prescribed conditions are complied with.
  • On conversion, the successor LLP , will be allowed to carry forward and set off of accumulated loss and unabsorbed depreciation allowance
  •  On conversion, the successor LLP will be allowed to amortize the expenditure incurred under voluntary retirement schemeOn conversion, the successor LLP will not be allowed to take the credit of MAT paid by the predecessor company.

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:

  1. 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.

  2. 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 ; and
    • A partner of a limited liability partnership as defined in the Limited Liability Partnership Act 2008.
  3. 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

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.

LLP can claim the following deductions:-

  • Interest paid to partners, provided such interest is authorised by the LLP Agreement.
  • Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual.
  • The remuneration paid to such working partner must be authorised by the LLP Agreement and the amount of remuneration must not exceed the given limits

    When section 184 is not complied with, the consequence is that no deduction towards interest and remuneration
    is allowed. This is the mandate of the section 185.

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:-
    • Income from House Property
    • Profits and Gains of Business or Profession
    • Capital Gains
    • 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 firm.

Assessment of Partners of LLP

  • Exemption of partner’s share income from LLP :
    Section 10(2A) exempts the share income from the LLP in the hands of the partner. The share of a partner in the total income of a LLP separately assessed as such shall, be an amount which bears to the total income of the LLP the same proportion as the amount of his share in the profits of the LLP in accordance with the LLP Agreement bears to such profits.

    The share of the partner in the income of the LLP is not included in computing his total income i.e. his share in the total income of the LLP shall be exempt from tax.

  • If conditions of Section 184 and 40(b) of the Act are satisfied, then any interest, salary, bonus, commission or remuneration paid/payable by the LLP to the partners is taxable in the hands of partners (to the extent these are allowed as deduction in the hands of the LLP).
  • The points to be noted are :-
    • Remuneration to partner not to be treated as salary income : Explanation 2 to section 15
      This Explanation provides that the salary, bonus or commission received by a partner from his LLP will not be treated as salary. This Explanation implies that the provision of tax deduction at source for salary (section 192) will not be attracted to the remuneration received by the partner from the LLP.
    • Treatment of remuneration and interest to a partner as business income : Clause (v) of section 28
      Section 28(v) provides that interest and remuneration received by a partner from his LLP shall be chargeable to income-tax as profits and gains of business. The proviso clarifies that where the remuneration, interest, etc.,
      is in excess of the ceiling fixed under the new section 40(b) and is disallowed in part for that reason then the
      income under the head referred to in section 28(v) shall be adjusted to the extent of the amount not so allowed
      to be deducted.

      Any expenditure incurred in order to earn such income can be claimed as a deduction from such income. For
      example, if a partner borrows money to make his capital contribution to the LLP and he is paid interest on
      his capital contribution, the amount of such interest will be taxed under the head "Profits and gains of
      business or profession", but the interest paid by him on the borrowed money will have to allowed as a deduction.
      If the whole or a part of salary/interest is not allowed as deduction in the hands of the LLP, than the whole or that
      part of salary/ interest is not taxable in the hands of the partners. In other words, in the hands of partners
      the entire remuneration/ interest (excluding the amount disallowed under section 40(b) and/or section184 of the Act)
      is chargeable to tax.
  • Ceiling as to remuneration payable to working partners and interest to partners : Section 40(b)

    Section 40(b) is a disallowance provision and disallows remuneration, interest, etc., received by the partners from the firm provided the same exceeds the ceiling prescribed in the same provision. It also specifies as to how the matter of deductibility of interest and remuneration is to be dealt with where a partner is a partner in representative capacity.

    The Explanation 3 defines the term “book profit” which is relevant for computing the upper ceiling of remuneration payable to all the working partners put together. The Explanation 4 defines “working partners” who alone are made entitled to remuneration if the deductibility of the related amount in the hands of the LLP is not to be barred by section 40(b).

    Limits of Remuneration to Partners:

    The Income Tax Act prescribes the ceiling limit upto which any payment of salary, bonus, commission or remuneration will be allowed as deduction for income of LLP, the limits of remuneration are outlined below:

    On First Rs 3,00,000 of book profit or in case of loss Rs 1,50,000 or at the rate of 90% of the book-profit, whichever is more
    On the balance of book profit at the rate of 60%

    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.

    LLP not covered under Presumptive Taxation

    Under the Income Tax, if an eligible assessee is carrying on any eligible business, than for the purpose of calculation of his taxable income, a sum equal to 8% of the turnover or gross receipts of the assessee in the previous year on account of such business or as the case may be, a sum higher than the aforesaid sum ,claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". Tax payable on such income is called as presumptive tax.

    An eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains calculated as aforesaid and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB of Income Tax Act.

    Explanation.—

    a) "eligible assessee" means,—

    (i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008; and

    (ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading "C.—Deductions in respect of certain incomes" in the relevant assessment year;

    b) "eligible business" means,—

    (i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and

    (ii) whose total turnover or gross receipts in the previous year does not exceed an amount of Sixty Lakhs rupees.'

UNION BUDGET 2011-12: LLP’S ARE NOW SUBJECT TO ALTERNATE MINIMUM TAX (AMT)

Applicability

In order to save revenue on account of companies converting to LLP’s to take benefits of tax exemptions and to rationalize taxation of LLP’s with companies, this Union Budget has proposed to introduce a new Chapter XII-BA under the Income Tax Act 1961 which provides for levy of Alternate Minimum Tax @ 18.5% on the adjusted total income of Limited Liability Partnerships. The effective rate of AMT after taking in account education cess will be 19.05%.

As per the provisions of the chapter XII-BA, where the regular income tax payable by a LLP for a particular financial year is less than the corresponding alternate minimum tax computed at the rate of 18.5% on its adjusted total income; such alternate minimum tax shall be deemed to be the income tax liability of such LLP.

Adjusted total income shall be the total income as increased by the deductions claimed under any section included in chapter VI-A ( C ) (deductions in respect of certain income) and deductions claimed under section 10AA (deduction available to SEZ units).

To check out the special provisions of alternate minimum tax (AMT), click here.

AMT VS MAT

The concept to AMT is similar to the Minimum Alternate Tax (MAT), as applicable to the Companies but since there is no concept of book profits in case of LLP, the LLP’s will be liable to pay AMT on their adjusted total income (equivalent to adjusted taxable income). Similar to Company, LLP paying AMT can claim its credit for 10 assessment years. But as opposed to Company, LLP will not be liable to pay AMT on those income, which are exempt under provisions of Income Tax like long term capital gain under section 10 (38) and income from dividend under section 10 (34) etc

 

MAT AMT
Section 115JB(1) Chapter – XII-B Section 115JC Chapter XII-BA
Provision A Company is required to pay a minimum alternate Tax (MAT) on its book profit, if the income tax payable on the total income, as computed under the income tax act  in respect of any previous year relevant to the assessment year commencing on or after 1st April 2011, is less than the MAT. Where the regular 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 LLP shall be liable to pay income tax on such total income.

“Adjusted total income shall be total income as increased by the deductions claimed under any section included in chapter VI-A C (deductions in respect of certain income and deductions claimed under section 10AA (Deduction available to SEZ units).

Regular Tax means the tax payable under the income tax act for LLPs excluding the provisions of chapter 115JC.

 

Rate 18.5% + Surcharge (5%) +Education Cess (3%)  i.e. 20% 18.5% +Education Cess (3%) i.e 19.05%

(Surcharge is not applicable on Limited Liability Partnership)

Tax Credit The tax credit to be allowed shall be the difference of the Minimum Alternate tax paid for any assessment year and the amount of tax payable by the assessee on his total income computed in accordance with the other provisions of this Act.

The tax credit is allowed to the extent of the excess of the alternate minimum tax paid over the regular income tax.

Carrry Forward  of Tax Credit Tax credit will be carried forward for a maximum period of 10 years from the year in which such credit arose. Tax credit will be carried forward for a maximum period of 10 years from the year in which such credit arose.

Infrastructure & IT Projects

LLP’s which are executing infrastructure projects or are carrying on IT related business and are otherwise eligible for incentives under section 80IA etc. will be badly hit by the applicability of AMT, as till now they were exempt from payment of MAT but they will have to shell out AMT from their pockets.

AMT: Hitback for LLP

Before the introduction of the Union Budget 2011-12, LLP was considered as very tax effective business vehicle as it was not subject to Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT). The introduction of AMT has dented the attractiveness of LLP but not to large extent because LLP with its inherent flexible structure coupled with exemption from DDT still remains a viable form of business for investors in the long run.

Capital Gain on conversion of Partnership into LLP

LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions , the provision of capital gain will apply.

* Capital Gain on conversion of Company into LLP

The Finance Bill 2010-11 has proposed to insert a new clause (xiiib) under Section 47 of the Income Tax Act, 1961 whereby any transaction concerning transfer of a capital asset or intangible asset by a Private Company or unlisted Public Company to a Limited Liability Partnership as a result of conversion of the company into a Limited Liability Partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 would be exempted from the provision of Capital Gain Tax, only if the following conditions are satisfied .

  1. All the assets and liabilities of the Company immediately before the conversion shall become the assets and liabilities of the limited liability partnership;
  2. All the shareholders of the Company immediately before the conversion shall become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in LLP should remain in the same proportion as their shareholding in the company on the date of conversion;
  3. The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;
  4. The aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than fifty per cent at any time during the period of five years from the date of conversion;
  5. The total sales, turnover or gross receipts in business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and
  6. No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion.

However in case of non compliance of any of the conditions provided as aforesad, the amount of profits or gains arising from the transfer of such capital asset or intangible asset not charged under section 45 by virtue of conditions laid down in the said proviso shall be deemed to be the profits and gains chargeable to tax of the successor limited liability partnership for the previous year in which the requirements of the said proviso are not complied with.”.

*Carry forward and set off of accumulated loss and unabsorbed depreciation allowance, on conversion into LLP:

In case of reorganization of business by way of conversion of a Private Company or unlisted Public Company to Limited Liability Partnership, which fulfills the conditions laid down in the proviso to clause (xiiib) of section 47 of the Income Tax Act 1961, the accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance
for depreciation of the successor limited liability partnership for the purpose of the previous year in which business reorganisation
was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall
apply accordingly

However in case of non compliance of the conditions provided under section 47(xiiib) , the set off of loss or allowance of
depreciation made in any previous year in the hands of the successor limited liability partnership, shall be deemed to be the
income of the limited liability partnership chargeable to tax in the year in which such conditions are not complied.

*Amortization of expenditure incurred under Voluntary Retirement Scheme

In case of reorganization of business by way of conversion of a Private Company or unlisted Public Company to Limited
Liability Partnership, which fulfills the conditions laid down in the proviso to clause (xiiib) of section 47, the provisions of section 35
DDA of the Income Tax Act 1961 shall, as far as may be, apply to the successor limited liability partnership, as they would have
applied to the said company, if reorganisation of business had not taken place, which means that successor LLP shall be allowed
to carry forward the expenditure incurred under voluntary retirement scheme by the predecessor company and amortize the same
in accordance the provisions of section 35DDA ,while calculating the profit and gains of the business in previous year

*Benefit of tax credit in respect of Minimum Alternate Tax (MAT) paid by the Company

In case of conversion of a Private Company or unlisted Public Company into a Limited Liability Partnership under the Limited
Liability Partnership Act, 2008, the provisions of section 115JAA of the Income Tax Act 1961, providing for credit of MAT paid by
the Company in the previous year out of the tax payable in the succeeding years, shall not apply to the successor Limited
Liability Partnership. In other words, any benefit of the MAT credit in hands of Private Company or unlisted Public Companies will not
be continued in the hands of successor LLP


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