The government is looking to effect fresh changes to the Limited Liability Partnership Bill to introduce a pass-through mechanism where the tax liability won’t be borne by the firm, but instead will be absorbed by the partners.
The Bill, which was introduced in the Rajya Sabha in December last year by the ministry of company affairs (MCA), is pending approval in Parliament.
A limited liability partnership (LLP) is an alternative business structure falling between a partnership firm and a corporate body, combining the limited-liability benefits of a company with the flexibility of a partnership.
Largely seen to benefit those in the service sector, such as chartered accountants, lawyers, consultants and venture capitalists, LLPs may also be useful in forging smaller firms where one partner provides the technical expertise and the other invests capital. This concept also comes handy in the small-scale sector, as firms in this sector need not go to the capital market to raise funds.
The MCA hopes that the Bill will be passed in the monsoon session of Parliament. Even while other provisions for LLP firms are well laid out in the Bill, in the present form it is silent on tax provisions that govern LLP firms since taxation is the finance ministry’s domain.
Prem Chand Gupta, the minister for company affairs, has written to the finance ministry asking that the tax structure of LLP firms should be in line with those prevailing for such firms in the developed markets, where the tax is a pass-through.
“In the UK and most European countries, with the exception of a few like Belgium, while the LLP firm is required to file tax returns only for statistical purposes, the tax liability falls on individual partners,” said T.P. Ostwal, a Mumbai-based tax expert who has closely worked with the Central Board of Direct Taxes.
According to a senior MCA official, who spoke on condition of anonymity, the taxation structure for LLPs is expected to be included in the Direct Tax Code of the new Income-tax Act being finalized by the finance ministry.
However, not every tax expert is in favour of effecting change in this manner. According to a Delhi-based tax expert, who did not want to be identified, it would be easier for the government to expand the tax provisions relating to LLP firms under the existing Income-tax Act rather than include it as part of the direct tax code.
“Partnerships in India are covered under the Indian Partnership Act, 1932, and the tax provisions relating to the same are spelt out in the Income-Tax Act. If the government decides to allow a pass-through as is the case in the UK, it will need to incorporate several suitable provisions in the Direct Tax Code,” said the expert.
He pointed out that the reason why partners in an LLP in the UK bear tax liability is because the laws there treat a typical partnership as a pass-through. “That is not the case in India. Here, the tax liability falls at the partnership level and not at the level of the individual members, which is why it’s easier to extend these provisions to the LLP rather than formulate new ones,” he said.