Budget 2009-10 is expected to clarify the tax treatment of limited liability partnerships (LLPs), the new corporate entities allowed since April 1 this year. The finance ministry is inclined to accept a corporate affairs ministry proposal to waive stamp duties on LLPs and grant them a tax-transparent status.
Under the LLP structure, partners or shareholders are not held responsible for the acts and actions of another, in stark variance to partnership firms or companies, where all directors or partners are jointly liable for the deeds of another partner or director.
But partnership firms are not rushing to switch to the LLP structure yet as the Limited Liability Partnership Act passed by Parliament in October 2008 is silent on the tax treatment for these firms.
The ministry of corporate affairs has been hoping that Budget 2009-10 will clear the air on LLPs? tax issues?as only a handful of firms has opted for this new corporate structure, belying the ministry?s expectation of two lakh LLP registrations in the first two years.
The tax treatment of income apart, stamp duties on partnership firms that wanted to become LLPs were also a significant hurdle. FE learns that North Block could exempt LLP aspirants from paying stamp duties. ?Such a clause already exists in the Companies Act. The High Court can disallow payment of stamp duties for a restructuring of companies where a transfer of assets is involved,? a government official said.
Officials also said the ministry demand for a tax-transparent status could get a nod in the Budget. This would mean that taxes in the LLP will be passed through, and each partner will be individually liable to pay income tax on his share of the business profits. This will allow LLPs to enjoy the same tax treatment given to partnership firms. The practice is also followed in most countries that have LLPs, such as the United Kingdom.
The issue has been in discussions for long and is a reason why LLPs are still not popular in the country. The finance ministry was earlier opposed to the move and wanted to treat LLPs as corporates for the purpose of calculating their tax liability.
?A tax-transparent status to LLPs would be a welcome step and it is followed in most countries where they are prevalent. But the finance ministry will also need to clarify on issues like set-off and carry-forward of losses as well as availability of tax credit under the system,? said Hemal Zolabia, executive director at PricewaterhouseCoopers.