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LLP Bill to skip taxation norms
November, 29th 2006

Professionals, corporates and traders waiting for the proposed limited liability partnership (LLP) model will have to wait a while to know how different the new business entitys taxation details will be.

The Limited Liability Partnership Bill, to be introduced in the current session of Parliament, will skip the question of taxation of LLPs. The is-sue of whether LLPs will be taxed like companies or like partnership firms or in yet another way, has been left for the revenue department to decide separately.

It is learnt that the ministry of company affairs (MCA) understanding with the finance ministry is that the latter would move an amendment to the Income Tax Act to address LLPs taxation in the current session itself. The MCA acknowledges the finance ministrys jurisdiction on this but does not want the purpose of the bill to be defeated by lack of clarity on its taxation.

The finance ministry had objected to MCA specifying the tax policy in the bill, when the concept note on LLPs was released earlier, saying that it is the exclusive domain of the North Block. Finance ministry officials, however, told ET that they have not taken a view on this.

The ministry wanted the profit-making activities of an LLP and its as-sets to be treated as the activities and the assets of the partners and not as that of the LLP a right not available to a company or to a general partnership. In that case, the partners should be taxed for capital gains as the assets are treated as their investments. If the assets were to be owned by the entity as in the case of a company or a part-nership, then the tax policy has to specify how much depreciation it could claim.

The advantage of giving the ownership of assets to the partners is that a partner can use his asset anytime and if he exits from the LLP, he can take his money out easily without the LLP being dissolved. In the case of companies and partnerships, this flexibility does not exist. Now, it remains to be seen how quickly the finance ministry comes up with an amendment to the IT Act. 

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