PRESENTED BY – SIDDHARTH GUPTABCOM(M)

ROLL NO. 609PROJECT GUIDE - PROF. S.SIRCAR

LIMITED LIABILITY PARTNERSHIP- AN INSIGHT TO TAXATION

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Content

Introduction

Difference between Partnership & LLP

Formation of LLP

An Insight to Taxation of LLP

CASE STUDY

CONCLUSION

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Limited Liability Partnership….An Introduction

•Introduced in India by way of Limited Liability Partnership Act, 2008

•It came into effect via notification dated 31-03-2009.

•Introduced via Budget 2009-10 in Income Tax Act, whereby it was made applicable that LLP will be treated as Partnership firms for the purpose of Income Tax and will be taxed like a partnership firm.

History

•To have an overview about the global scenario of Limited Liability Partnerships.

•To empirically examine the tax structure of Limited Liability Partnerships.

•To empirically examine the tax implications associated with the conversion of a Company/Firm into a Limited Liability Partnership.

Objectives

“The concept of Limited Liability Concept under the roof of Partnership will bring a lot of Diversity.”

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Limited Liability Partnership….Overview

It combines the advantages of both the company and Partnership into a single form of organization. In an LLP one partner is not responsible or liable for another partner’s misconduct or negligence.

In this type of partnership all partners have a form of limited liability for each individual’s protection within the partnership, similar to that of the shareholders of a corporation.

However unlike corporate shareholders, the partners have the right to manage the business directly. An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP's employees or other agents.

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.

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Content

Introduction

Difference between Partnership & LLP

Formation of LLP

An Insight to Taxation of LLP

CASE STUDY

CONCLUSION

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LLP-vs.-PARTNERSHIP FIRM….Comparison

Maximum Partner requirement is same. However, in case of Partnership firm maximum partners are 20 which is unlimited in case of LLP.

LLP are separate legal entity and its registration is mandatory unlike the erstwhile Partnership firm. The name of the LLP has to be approved by the registrar and must have LLP as suffix.

Liability is limited in case of LLP as compared to the Partnership form of business.

Partnership form of business is governed by the provisions of Indian Partnership Act, 1932 whereas the LLP is governed by the provision of Limited Liability Partnership Act, 2008

An LLP can hold the property in its name, however a partnership firm cannot do the same.

Minor cannot become a partner in an LLp which was however allowed in the erstwhile Partnership form of business.

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Content

Introduction

Difference between Partnership & LLP

Formation of LLP

An Insight to Taxation of LLP

CASE STUDY

CONCLUSION

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Limited Liability Partnership….Formation

Deciding the partners and designated

partners

Obtaining DPINObtaining Digital

Signature

Registration on LLP portal

Name Availability

Filing of Incorporation

Documents

Obtaining Certificate of Incorporation

Drafting of LLP Agreement

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Content

Introduction

Difference between Partnership & LLP

Formation of LLP

An Insight to Taxation of LLP

CASE STUDY

CONCLUSION

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Limited Liability Partnership….An Insight to Taxation

Section 5 of the Income Tax Act, 1961 describes the scope of income that would be subject to taxation in India based on the residential status of the taxpayer.

A partnership is taxable entity under the Income Tax Act. Once, the partnership is taxed on its income, then, the same income is not taxed separately in the hands of the person, who is a partner in such a firm,

Finance incorporated the taxation scheme of LLPs in the Income Tax Act on the same lines as applicable for general partnerships i.e. tax liability would be attracted in the hands of the LLP and tax exemption would be available to the partners

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Limited Liability Partnership….Taxation Aspects

LLP Taxation at a glance

Conversion of Company into LLP

Tax Planning of LLP

Pros and Cons of LLP being taxed as

Firm

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Limited Liability Partnership….Tax Planning of LLP

Eligibility A certified copy of LLP agreement and if a change take place in the constitution must be accompanied in the ROI of the LLP of the P.Y. Notices of assessment must be complied without failure.

Entity LLP incorporated in India– Taxed as Firm as in Section 2(23)(i)LLP incorporated outside India – Taxed as Company

Rates Tax Rate – 30% , Surcharge – Not applicable, EC & SHEC - 3%

CHA

PT

ER X

II-B

A -

AM

TFA

CTS

Section 115JC vide Finance Act 2012 shall be applicable not only on LLP’s but “certain other person other than company”.

The Section starts with an non –obstinate clause that where the regular income-tax payable for a previous year by a LLP in less than the alternate minimum tax payable for a P.Y. the adjusted total income shall be deemed to be the total income of the limited liability partnership for such previous year and it shall be liable to pay income-tax on such total income at the rate of eighteen and one-half per cent.

Section 115JC(2) states the meaning of Adjusted total income as under –

“Adjusted total income referred to in sub-section (1) shall be the total income before giving effect to this Chapter as increased by—

(i) deductions claimed, if any, under any section (other than section 80P) included in Chapter VI-A under the heading "C.—Deductions in respect of certain incomes"; and

(ii) deduction claimed, if any, under section10AA.”

Section 115JD deals with tax credit available for alternate minimum tax which are as follows : Tax Credit for an assessment year shall be the excess of AMT over the regular income-tax payable of

that year. Such credit is allowed to be carried forward not beyond the tenth A.Y. succeeding the A.Y. in which tax credit becomes allowable.

If in any A.Y. the regular income-tax exceeds the AMT, the tax credit shall be allowed to be set off to the extent of the excess of regular income-tax over the AMT and the balance of the tax credit, if any, shall be carried forward.

ALTERANTE MINIMUM TAX

CASE LAW

In this regard reliance is placed on the decision of Apex Court in the case of Malayala Manorama Co. Ltd. vs. CIT [2008] 169 Taxman 471 (SC) wherein it has been held that the actual amount of the deduction considered for computing regular total income needs to be deducted.

ADJUSTED TOTAL INCOME Regular total income of LLP is nil. Its gross total income is Rs.

2,00,000 (after setting-off losses, etc.). It is eligible to the deduction under Part C of Rs. 5,00,000. However, only Rs. 2,00,000 is claimed, as it can be claimed only to the extent of gross total income. In this case, to determine Adjusted Total Income, Regular total income should be increased by Rs. 2,00,000, i.e., the amount claimed and not Rs. 5,00,000, being the amount eligible for deduction.

Tax Planning of LLP….Continued

Exam

ple

Particulars Assessment Year

2012-13 2013-14

Regular Total Income 1,000 1,000

Adjusted Total Income 5.000 1,100

AMT Payable 5,000*18.5% = 925 1,100*18.5% = 203.50

Regular Income Tax Payable 1,000*30% = 300 1000*30% = 300

Amount of credit available as per section 115JD(2) 925-300 = 625 -

Credit allowed to be set off u/s 115JD(5) - 300-203.5 = 96.50

Amount of tax to be paid 925 under MAT 203.50 under normal provision

Balance of credit carried forward 625 625 – 96.50 = 528.50

As per section 115JD(4) tax credit shall be allowed to be carried forward not beyond the tenth A.Y. immediately succeeding the A.Y. 2012-13. In the instant case it shall be carried forward upto A.Y. 2012-13+10 = A.Y. 2022-23.

If the amount of regular income-tax or the AMT is reduced or increased as a result of any order the amount of tax credit allowed under this section shall also be varied accordingly.

• Lower tax rate of 30.90% vis-a-vis

32.45%

• No DDT on its profit distributions

• Reconstitution of Partnership – No impact on carry forward of losses

• No deemed dividend taxation

• Wealth tax provision not applicable

• No MAT – LLPs taxable under AMT

• May not qualify for tax holiday/

incentive provisions when restricted to company certain presumptive tax provisions can be invoked only by a foreign company and do not apply to an LLP. Following are some incentive not available

• 200% weighted deduction on

expenditure on In House scientific research

• Tax neutral

amalgamation/demerger of companies

possible

Limited Liability Partnership….Pros and Cons of LLP being taxed as firm

ADVANTAGES DISADVANTAGES

SOLUTION Finance Act 2010, inserted section 47(xiiib) which

stated that any transfer of capital asset or intangible asset or shares will not be regarded as transfer for the levy of capital gains tax u/s 45 of the act. However, this is subject to certain condition.

However following conditions are to be met for section 47(xiiib) to be effective which are :

All assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP;

All the shareholders of the company immediately before the conversion become partners of the LLP in the same proportion as their shareholding in the company;

For conversion, shareholders of the company do not receive any consideration, directly or indirectly, other than share in profit and capital contribution in the LLPs

The shareholders of the company continue to be entitled to receive at least 50 per cent, in aggregate, of the profits of the LLP for a period of 5 years from the date of conversion;

The total sales, turnover or gross receipts in business of the company do not exceed sixty lakh rupees in any of the three preceding previous years

For a period of three years from conversion, no amount is paid, directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion.

The issue arised in course of transfer under normal provision conversion would attracts levy of capital gains tax. Similarly, carry forward of losses, unabsorbed depreciation and certain other allowances is not available to the successor LLP.

Limited Liability Partnership….Conversion of Company into LLP

Delisting

LLP

Private Co. PUBLIC Co.

Section 56 & 57 of the LLP Act 2008

Is there no benefit for conversion

BIG QUESTION

ISSU

ECo

nd

itio

ns

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Other Benefits on SuccessionFifth proviso to section 32 provides for

computation of depreciation allowance on conversion. the amount of depreciation

shall be apportioned the predecessor and the successor in the ration of number of

days for which assets were used by them.

Section 43(6) of the Act defines ‘written down value’ of assets for claim of

depreciation. The cost of acquisition of capital assets for the successor LLP will be deemed to be the written down value for the predecessor company on the date of

conversion.

On private company or unlisted public company is succeeded by a LLP fulfilling

the conditions laid down in the proviso to clause (xiiib) of section 47, amount of

deduction under section 35DDA unamortized in the hands of the

predecessor company shall be allowed to the successor LLP as would have been

allowed to the company, had the conversion not taken place

Further, as per section 72A(6A) carry forward and set-off of business loss and unabsorbed depreciation by the successor LLP which fulfills the above mentioned conditions of section 47(xiiib) of the Act are allowed

Tax Impact10.10%

Limited Liability Partnership….Conversion of Company into LLP

PARTICULARS COMPANY LLP

Profit Before Tax 100.00 100.00

Less: Income Tax 32.45 30.90

Profit After Tax 67.55 69.10

Less; Transfer to Reserves 6.75 -

Less: Dividend Distribution

Tax @ 16.22%

8.50 -

Dividends / Profit available

for distribution

52.30 69.10

Total Tax 40.95 30.90

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Content

Introduction

Difference between Partnership & LLP

Formation of LLP

An Insight to Taxation of LLP

CASE STUDY

CONCLUSION

PROFIT & LOSS ACCOUNT

Case Study….Analysis

FIN

AN

CIA

LS

Particulars `(Rs. In thousands)

X CO. X LLP

Turnover 2,48,793 2,48,793Other Operating Data 4421 4421

Income 2,53,214 2,53,214Operating Expense :Staff costs 1,09,242 1,09,242

Depreciation, Amortization and Impairment 7,103 7,103

Other operating expenses 75,761 75,761Finance Cost :Interest payable 1.956 1.956Other Similar charges 190 190Profit before appropriation 58,962 58,962Interest on Partners’ capital - 250Partners’ remuneration - 28,800

Profit after appropriation before taxation 58,962 29,912

Taxation 18,260 9,240Profit after taxation 40,682 20,672

BALANCE SHEET

Case Study….Continued

FIN

AN

CIA

LS

Particulars (Rs. In thousands)

X CO. X LLP

Fixed Assets 17,189 17,189Investments - -Current Assets :Debtors 1,44,306 1,44,306Amount due from members 18,366 18,366Cash at Bank and in Hand 4,576 4,576

1,67,248 1,67,248Current Liabilities :

Creditors : Amount falling due within one year 62,041 62,041

Amount due to members 2,141 2,14164,182 64,182

Net Current Assets 1,03,066 1,03,066Total Assets less Current Liabilities 1,20,255 1,20,255Non Current Liabilities :Creditors: Amount falling due after one year 14,739 14,739Revolving capital loans 47,971 47,971Provision for liabilities & charges 20,543 20,543Net Assets attributable to shareholders/members

37,002 37,002

COMPUTATION

Case Study….Continued

TAX

ATIO

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Particulars (Rs. In thousands)

X CO. X LLP

Income from Business Profession (Note1)

58,962 29,912

Gross Total Income 58,962 29,912

Taxable Income (A) 58,962 29,912

Tax on (A) above @ 30% 17,960 8,970

Add : EC @ 2% 350 180

Add : SHEC @ 1% 190 90Total Tax Liability under normal provision (i)

18,260 9,240

Book Profit for MAT (B) 58,962 -

Income for AMT (C) - 29,912MAT on (B) (ii)

11,235 -

AMT on (C) (ii)

- 5,700

Tax payable (Higher of (i) or (ii) 18,260 9,240

Savings in Rs. 18,260-9240 = 9,020

Tax Savings

INR 90.20 lacs.

Effectively 49,40%

NOTE 2NOTE 1

Case Study….Continued

TAX

ATIO

N

Particulars (Rs. In thousands)X CO. X LLP

Profit as per P&L A/C 58,962 29,912Add : Items to be added separatelyInterest on partner capital - 250Partners’ remuneration - 28,800Depreciation 7,103 7,103Less: Expenses allowable:Partners’ Remuneration(Note2) - 28,800Interest on Partners’ Capital - 250Depreciation as per I.T. Act, 1961 7,103 7,103Income from Business or Profession 58,962 29,912

Particulars Amount (inRs.)

On first Rs. 3,00,000/- Higher of – Rs. 1,50,000/- or 90% of Rs. 3,00,000/-

2,70,000

On balance Rs. 5,86,62,000 3,51,97,200Eligible Remuneration 3,54,67,200Actual remuneration 2,88.00,000Allowable remuneration (lower of the above)

2,88.00,000

AN

ALY

SIS

It is observed in the given case study that the taxable income of X Co. is Rs. 5,89,62,0000 while that of X LLP is Rs. 29,912,000 at the same level of turnover. This difference in the taxable income can be justified on the grounds that, firstly, a Limited Liability Partnership is entitled to an additional deduction of Partner’s Remuneration and Interest on Partners. Hence, the same can be claimed as expense by the LLP.

It can be found that LLP has claimed an additional deduction of Rs. 29,050,000 from is profit before appropriation. Hence, it has been able to save a Income Tax @ 30% on this portion of Rs. 29,050,000. The same is taxable in the hands of the partners at a lower rate for individual assessee.

Further, if X CO. want to distribute its profit to the shareholders in the form of dividend it has to pay a Dividend Distribution Tax @ 15.45%. However the same has not to be paid by an LLP when distributing the profits.

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Content

Introduction

Difference between Partnership & LLP

Formation of LLP

An Insight to Taxation of LLP

CASE STUDY

CONCLUSION

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LLP-vs.-PARTNERSHIP FIRM….Conclusion

LLP is a comparatively new form of business organization in India and various

opportunities exist with regard to its formation and functioning.

On the horizon of business matrix, a new star is now sited. While ease in operations of

partnership and armor of limited liability is provided under a new format of business entity

i.e. Limited Liability Partnership: (LLP).

L For the purpose of taxation, the Income-tax Act, 1961 (the Act) equates LLP with the

partnership firm [section 2(23)]. Therefore, no separate tax rate or legal provisions are

prescribed for LLPs. Tax rate prescribed for firms of 30% is automatically applicable and

similar is in case of the rest of the provisions.

On account of the obvious advantages of LLP medium for conducting business owned by

multiple entities, it will be fancied by many. The new ventures will embrace to this

ownership platform; however, the existing ones who desire to convert to this new model

shall also be governed by the conversion provisions of LLP.

The amendments giving concession on conversion of company into LLP, are welcome.

However, these will be of little utility, unless suggestions made in this paper are addressed

by the Finance Minister at Centre and States.

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LLP-vs.-PARTNERSHIP FIRM….Limitation

Since, the project is entirely based upon the hypothetical data, the direct

observation is literally impossible.

The sources of secondary data with regard to financial analysis of a Limited

Liability Partnership in India are very limited due to lack of popularity of

this type of business form, hence analysis of tax implications on the basis of

real life data was not possible.

The Income Tax Act, 1961, is too vast and it is not possible to cover each and

every provision in the available short span of time.

Since, the act itself has not precisely declared provisions about the taxation

of Limited Liability Partnership in certain cases, thereby, there may arise a

contradiction of opinion.

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