New Delhi: The government’s plans to come up with the first limited liability partnership, or Llp, firm on 1 April may not happen as the finance ministry will wait for the coming Finance Bill to clear the taxation structure of the proposed Llp.

As a result, companies and partnership firms converting to Llp or new firms registering as Llps will have to wait for about six months before they get clarity on how the new entity will be taxed.

“Grey areas as regards taxing Llps will be cleared in the next Finance Bill—that is, the next government," said a senior official at the ministry of finance (MoF) who didn’t want to be named.

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.

The Llp Bill, which aims to give professionals such as chartered accountants, lawyers and venture capitalists more flexibility in setting up new firms, was passed by Parliament last week. It was introduced by the ministry of corporate affairs. The taxation issue of Llp firms, which were non-existent so far, have to be dealt with by the finance ministry.

According to the same finance ministry official, the ministry of corporate affairs wanted clarifications on taxing Llps in the Llp Bill. “However, MoF rejected the proposal as amendments to tax are done only through the Finance Bill," he said.

A Llp will need to be recognized as a legal entity under the Income-Tax Act, 1961.

The current Indian government is at best likely to have a vote-on-account this February and not a full-fledged 2009-10 budget as national elections are due before May. A new government then gets to introduce its own budget.

Prem Chand Gupta, minister of corporate affairs had said at the time of Llp Bill being passed in Parliament that the first Llp should start on 1 April. Gupta also said while the taxation issue will be decided by the finance ministry, Indian Llps will in no way be put to any disadvantage.

“Our Llps will have a level playing field with other similar bodies outside the country," Gupta said in Parliament.

His ministry is in favour of a pass-through mechanism whereby the tax liability won’t be borne by the firm but, instead, will be absorbed by the partners.

In the UK and most European nations, the tax liability falls on individual partners. In the US, a flexible system exists where partners decide whether they or the firm be taxed.

Earlier, a parliamentary standing committee on finance, headed by Ananth Kumar, a member of the Lok Sabha representing the opposition Bharatiya Janata Party, had submitted its recommendations in the winter session of Parliament and had suggested providing such a flexibility.

Experts in the area are already saying the flexibility needs to be built into Llp’s taxation structures.

“Any income earned by Llps must be accorded a pass-through status, that is, partners must be directly taxed on any income distributed by the Llps. This will be in conjunction with the taxation laws for Llps in UK," said Akil Hirani, managing partner of leading law firm, Majumdar and Co.

Hirani also said a pass-through status under the Income-Tax Act has already been allowed for venture capitalist registered with the Securities and Exchange Board of India, or Sebi, in nine high growth sectors such as nano technology, bio technology, research and development in pharmaceutical sector etc.

“A pass-through status will make taxation system easier and avoid the kind of complications that exists currently in the partnership firms, where partners remunerations are tax free up to a certain limit but the firms profits are taxed," said Hirani.

Ved Jain, president of the Institute of Chartered Accountants of India said: “Since Llp is a new concept, the taxation structure should be such that more flexibility is provided to partners in paying their taxes so that more people are encouraged to opt for Llp."