The finance ministry and its corporate affairs counterpart are driving a hard bargain on the issue of making India?s newest corporate business structure ? limited liability partnerships (LLPs) ? more attractive to businesses.
The finance ministry believes that LLPs? low acceptance as a business structure could be improved by creating awareness about the hybrid business vehicle?s flexibility, and tax breaks are not the way to popularise it. LLPs, which combine the benefits of a company and those of a partnership, have seen only 635 registrations so far.
The ministry of corporate affairs (MCA), however, attributes the model?s relatively low acceptance to the incidence of the capital gains tax and the stamp duty levied by states when an unlisted company seeks to get converted into an LLP. The MCA has asked the revenue department in the finance ministry to let unlisted companies get converted into LLPs without paying capital gains tax and stamp duty.
The revenue department, however, does not favour relaxing the tax structure without first educating the corporate sector about LLP?s advantages. The department, however, could concede to the MCA?s demands if the rate of conversion goes up, said a finance ministry official.
The capital gains tax adds to the cost of conversion for companies that have capital assets such as immovable property. This is levied on the value of appreciation of a capital asset, excluding the effect of inflation. Long-term capital gain from property transfer attracts 20% tax after three years of acquisition. Stamp duty on asset transfer is levied by state governments at different rates.
?The ministry of corporate affairs is in talks with the finance ministry to lay clear-cut guidelines on the taxation issue to encourage formation and conversion to LLPs,? a senior MCA official told FE.
The industry is also seeing more tax breaks. ?Absence of certain taxation provisions will only delay the formation and conversion of LLPs and thus growth of business activities,? industry chamber Assocham has said.
