New Delhi: The budget for 2009-10 is likely to put in place tax laws for limited liability partnership, or LLP, firms.
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In December, Parliament approved the creation of such firms, a move that was expected to make it easier for chartered accountants, lawyers and venture capitalists to set up new firms.
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“A fortnight ago, ministry of corporate affairs (MCA) officials had a meeting with the income-tax (I-T) department officials. I-T officials assured us that the tax structure for LLP firms will be presented in the budget and suitable amendments to the I-T Act will be made,” said a senior official at MCA, who did not want to be identified.
Separately, another MCA official, who also did not want to be identified, confirmed the move. “Although the I-T department has not divulged the details of the taxation structure, it has said that taxation norms for LLP firms will be announced in the budget.”
The second official said that thus far, 42 LLP firms have registered themselves with MCA.
While the Bill passed by Parliament was introduced by MCA, the tax structure for LLP firms, which were non-existent so far, has to be decided by the finance ministry. Besides, an LLP will need to be recognized as a legal entity under the Income-Tax Act, 1961.
According to the first official, MCA has been in favour of a pass-through mechanism, whereby the tax liability won’t be borne by the firm and instead be absorbed by the partners.
“It’s for the finance ministry to take a call,” he added.
Finance ministry officials could not be reached for comment. However, a finance ministry official speaking on condition of anonymity had said at the time the Bill was passed in December that “grey areas as regards taxing LLPs will be cleared in the Finance Bill”.
In the UK and most European nations, the tax liability in LLPs falls on individual partners. In the US, a flexible system exists where partners decide whether they or the firm will be taxed.
Last year, a parliamentary standing committee on finance, headed by Ananth Kumar, a member of the Lok Sabha representing the Bharatiya Janata Party, had submitted its recommendations and had suggested providing such flexibility.
Hemal Zubalia, executive director at audit and consulting firm PricewaterhouseCoopers, said taxing the firm is the better option.
“There are several issues which the government needs to address if the partners are to be taxed. For instance, when one partner is a non-resident, the tax treaty benefit (between two countries) will be jeopardised. Similarly, what happens when the firm makes a loss and does not distribute profits to partners? I feel it is best for the firm to be taxed and profits distributed to partners are tax free.”