Llp Mantra Vol V 07 Sep2009
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Llp Mantra Vol V 07 Sep2009

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Llp Mantra Vol V 07 Sep2009

Llp Mantra Vol V 07 Sep2009

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    Llp Mantra Vol V 07 Sep2009 Llp Mantra Vol V 07 Sep2009 Document Transcript

    • LLP MANTRA A Publication by Corporate Professionals - {Y-01).{V-05) O
    • Insight Part ic ulars Page N o. R egular Sec tion – T ax As pect of LLP 3-6 F AQ’S – T ax at ion of LLP 7-8 LLP in N ews 9-10 T ax ation Segm ent on Global C om paris on 11 Gary I s s ues 11 R ec ent Queries on LLP C lub 12 Public Opi nion 12 Our Of f erings 13 2-14
    • Regular Section Taxation aspect of Limited Liability Partnership The Budget 2009-10 has introduced the provisions regarding taxation aspect of the newly introduced form of business Limited Liability Partnership. As per the Budget 2009-10, LLP will be treated as Partnership firms for the purpose of Income Tax and will be taxed like a partnership firm. Change in Definition of Firm, Partner & Partnership The Budget 2009-10 has amended the definition of Firm and Partners in the following manner: a. Firms shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability Partnership as defined in the Limited Liability Partnership Act 2008. b. Partner shall have the meaning assigned to it in the Indian Partnership Act 1932 and shall include • Any person, being a minor, has been admitted to the benefits of partnership; • A partner of a limited liability partnership as defined in the Limited Liability Partnership Act 2008. c. Partnership shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability partnership as defined in the Limited Liability Partnership Act 2008. Tax rate: 30% flat tax rate + 3% education cess No Minimum Alternate Tax & Dividend Distribution Tax 3-14
    • Eligibility (section 184): In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to satisfy the following criteria  The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.  The individual shares of the partners are very clearly specified in the deed.  A certified copy of LLP Agreement must accompany the return of income of the LLP of the previous year in which the partnership was formed.  If during a previous year, a change takes place in the constitution of the LLP or in the profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be submitted along with the return of income of the previous years in question.  There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP. Steps for Computation of taxable income of a LLP:-  Find out the firms income under the different heads of income, ignoring the prescribed exemptions. The heads of income are:- o Income from House Property o Profits and Gains of Business or Profession o Capital Gains o Income from other sources including interest on securities, winnings from lotteries, races, puzzles, etc. ('Salary' income head is not included)  The payment of remuneration and interest to partners is deductible if conditions of section 184 and section 40(b) of the Income Tax Act are satisfied. Any salary, bonus, commission or remuneration which is due to or received by partners is allowed as a deduction from income of the partnership firm and the same is taxable in the hands of partners.  Make adjustments on account of brought forward losses/ disallowances of interests, salary, etc paid by firm to its partners. The total income so obtained is the "gross total income".  From the "gross total income", make the prescribed deductions and the balancing amount is the "net income" of the LLP. Signing of Income tax Return: The designated partner shall be responsible for signing the income tax return of LLP, where for unavoidable reasons, such designated partner is not able to sign the same or where there is no designated partner, any partner will sign the return. 4-14
    • Tax Comparison Chart In case of Income of Rs. 1 Lakh Particulars Companies Partnership Firms LLP Foreign Companies Amount in Tax 30900 30900 30900 41200 (in Rs.) In case of Income of Rs. 1.10 Crore Particulars Companies Partnership Firms LLP Foreign Companies Amount in Tax 37,38,900 33,99,000 33,99,000 46,45,300 (in Rs.) On Dividend/Profit Distribution of Rs. 1 Lakh Particulars Companies Partnership Firms LLP Foreign Companies Amount in Tax 16,995 Nil Nil N.A. (in Rs.) 5-14
    • In case MAT is applicable and Book Profits is Rs. 1 Lakh Particulars Companies Partnership Firms LLP Foreign Companies Amount in Tax 15,450 Nil Nil 15,450 In case MAT is applicable and Book Profits is Rs. 1.10 Crore Particulars Companies Partnership Firms LLP Foreign Companies Amount in Tax 18,69,450 Nil Nil 17,41,987 6-14
    • FAQ’S - Taxation What is the tax treatment being provided for LLPs? The Union Budget 2009-10 has introduced the tax provisions for LLP. According to it, LLP will be treated as Partnership firm for the purpose of tax and therefore will be taxed on the line of partnership firm. Who will be responsible for signing the Income tax return? The designated partner shall be responsible for signing the income tax return of LLP, where for unavoidable reasons, such designated partner is not able to sign the same or where there is no designated partner, any partner can sign the return. Whether interest on contribution is allowed under LLP? If yes, whether deduction of such interest would be allowed to LLP? Yes, interest on contribution is allowed but the same should be allowed under the LLP Agreement. However the deduction against such interest can be availed by LLP from its taxable income only if conditions of section 184 and section 40(b) of the Income Tax Act are satisfied. Whether is there any limit on payment of remuneration to partners? No, LLP Act 2008 has not prescribed any limitation/ restriction on the payment of remuneration to partners but the same should be provided under the LLP Agreement. However the Income Tax Act prescribes the maximum limit up to which the deduction to the LLPs for such remuneration is allowed against its taxable income. On First Rs 3,00,000 of book profit or in Rs 1,50,000 or at the rate of 90% of the book- case of loss profit, whichever is more On the balance of book profit At the rate of 60% The LLP can also pay remuneration beyond the aforesaid limit but the remuneration in excess of the limit will not be allowed as deduction against the taxable income. 7-14
    • Whether MAT or Dividend Distribution tax will be applicable on LLP? LLPs are in the same parlance as partnership firms so far tax provisions are concerned and therefore Minimum Alternate Tax and Dividend Distribution Tax will not be applicable for LLP. What is passing through taxation system? In countries like Singapore, UK, the income of LLP is not taxable in the hands of the LLP rather than it is taxed in the hands of partner to the extent of the profit distributed, this system of taxation is known as passing through taxation. Under this system, instead of taxing the LLP, its partners are taxed. What will be the treatment of remuneration in the hands of the partners under Income Tax? Remuneration to partners will be treated as their Income from Business & Profession and will be taxed accordingly. This also gives them the opportunity to undertake the necessary tax planning in respect of their remuneration from the LLP. Whether the benefits of MAT can be carried over post conversion of company into LLP? Provisions of MAT are applicable only to company & not to LLP and therefore in absence of corresponding provision in regard to carrying over the benefits of MAT under the Income Tax Act, LLP can enjoy the same post conversion. 8-14
    • LLP in News Foreign investment policy for LLP firms under review. The government has decided to clarify the foreign investment rules under the new limited liability partnership (LLP) framework. An official confirmed to FE that the ministry of corporate affairs has urged the department of industrial policy & promotion to work out the necessary guidelines as foreign investors are asking for clarity. The haste follows clearance of the tax treatment for LLPs in Budget 2009-10. Taxing LLPs at entity level a dampener for PE, VC Companies. Introduction of LLP on 1st of April this year raises a hope for PEs and VCs to have an alternative of trust route as vehicle for funds to pass through the tax at the entity level. But the budget announcement regarding the taxing of LLPs at the entity level has created some disappointment. It could also give rise to the issues pertaining to application of tax treaties and availability of tax credit to the foreign partners. The problems regarding the treatment of losses at the hands of the Partners may also wipe up. The industry would like an option for taxation at the entity or Individual level. LLP on a par with general Partnerships. Much awaited announcement since the LLPs are not recognized by the Income tax Act. The LLPs should be subjected to the same taxation scheme as prevalent for the general partnership which means that LLPs would be taxed, but the Partners would be exempted. 9-14
    • Tax Treatment of LLPs: Was the Budget a Let – Down? Mr. Mr. Anurag Goel, Secretary, Ministry of Corporate Affairs illuminating the features and tax aspects of Limited Liability Partnership Act, the very first Indian Act implemented in the electronic mode from the very beginning, said that LLPs are placed in the parlance of Partnership Firms as far as tax provisions are concerned and further making LLPs a preferred business model, the conversion from Partnership Firm to an LLP could have no tax obligations subject to the conditions of same rights and obligations of the Partners and no transfer of assets or liability after conversion. With these benefits Ministry is hoping this LLP to be best Corporate Structure for the professionals, service industry and SMEs. On the another side of the coin Mr. N.K Jain, Secretary, ICSI, highlighting the tax reforms in India, which are underway to bench mark the global practices, hoped for the taxation system of LLP to be so devised to provide flexibility through the Pass through system as prevalent in other parts of the world like UK, Singapore, Germany wherein the profits are allocated to partners for tax purposes. That could encourage the entrepreneurs to set up LLPs and would make this new model a success in India. Further to make the conversion process simplified and easier, clarity to be provided by the government regarding the stamp duty issues. To check out the complete articles click here 10-14
    • Global Scenario of LLP Taxation Facts LLP UK Singapore LLP USA LLP Indian LLP Tax Status of Pass through Pass through system is Pass through system LLPs would be LLP system is prevailing prevailing in UK. LLP is prevailing. LLP taxable in the in UK. LLP pays no pays no tax but its pays no tax but its same parlance of tax but its partners partners pay tax in partners pay tax in Partnership. LLP pay tax in relation relation to the income or relation to the income would be liable to the income or gains they receive or gains they receive for the payment gains they receive through the LLP. through the LLP. of Tax instead of through the LLP. Partners. Gray Issue As per the LLP Act 2008, LLP Agreement is the charter document of the LLP, the importance of this agreement can be ascertained by the fact, that the LLP Act gives the partners complete freedom to have terms and conditions in the Agreement, which can override the provisions of the Act. The LLP Agreement defines the business to carried on, rights, duties of the partner vis-à-vis other partners and in respect to the LLP like power to borrow, enter into contracts, how the LLP will be run and managed etc. Every third party dealing with any LLP, has to rely on the LLP Agreement, in order to be aware of the powers of each partner and extent of their dealing with third party. In case of companies, Memorandum of Association defines the scope of business of the Company and in case of LLP, it would be LLP Agreement. But unlike Memorandum of Association, LLP Agreement is not public document within the meaning of section 36 of the LLP Act, which deals with document available for public inspection. The non-availability of LLP Agreement as public document will restrict the rights of third party dealing with the LLP and could be the reason for various disputes in future. 11-14
    • Recent queries on LLP Club How do distributions get made in an LLP, whether the same be credited to the Partners account or can be carried in the reserves of the LL?. What to do with the profits in the companies in 2009-10 whether to carry forward in LLP and then use to minimize DDT? whether TDS applicable to LLP themselves & if company made any consultancy payment to LLP whether company deduct TDS if yes than what rate Whether the profits be taxed in the hands of Partner? Are there any succession provisions under the tax laws for creating an LLP/ What about implications under other laws such as stamp duty, VAT etc. Whether an advocate can form an LLP? Whether benefits of MAT can be carry forwarded post LLP conversion? To check out the replies or to rejoin the queries click here Public opinion Our Poll of the week “Whether LLP should be allowed to merge with Company” was favored by 63% audience while 25% audience was against the merger of LLP with Companies and in between these 13% audience remains constant for any decision. To count your vote on “Whether registration of charge like companies should be made mandatory for LLPs?” log in to www.LLPonline.in. 12-14
    • Our Services 13-14
    • Our Team Ankit Singhi – 011-40622208 Asst. Manager, Corporate Affairs & Compliances e mail: ankit@indiacp.com Sh i p r a W ad h w a -0 1 1- 4 0 62 2 2 46 A s so ci ate , C o r p o r at e A f f ai r s & C o m p li an ce s e m ai l: sh i p r a @ i nd i acp . co m Visit us at From the house of Corporate Professionals (India) Private Limited D-28, South Extn. Part-I, New Delhi-110049, Ph: 011- 40622200; Fax: 011- 40622201. Email: info@indiacp.com & info@LLPonline.in Our G a mu t o f S er v ic e s I NV EST ME NT B A N KI NG • I ND I A ENT R Y S ER VI C ES • M& A , C OR P OR A T E C OMP LI A NC ES & D U E D IL I G ENC E • C OR P OR A T E T A X A T I ON • S EC U R IT Y L A W A D V IS OR Y • A U D IT & A CC OU NT I NG S ER V IC ES Disclaimer: This paper is a copyright of Corporate Professionals (India) Pvt. Ltd. The entire contents of this paper have been developed on the basis of Limited Liability Partnership Act 2008. The author and the company expressly disclaim all and any liability to any person who has read this paper, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this paper. 14-14