Since Limited Liability Partnership is conceived of as a company, it would only be fair and logical to tax an LLP like a company.
The concept of Limited Liability Partnership (LLP) got an impetus following the recommendations of the Naresh Chandra and J. J. Irani committees. However, the Bill, as presented in the Rajya Sabha on December 12, 2006, ignores the recommendation of these committees and presents a different version.
The features that were expected to make LLPs popular were:
They would not be weighed down by unnecessary paperwork.
Regulation would be quality rather than quantity based. A balance would be struck in this matter.
Adequate flexibility would be provided in their working.
However, the Bill has overlooked the desired objectives. For instance, most of the regulatory provisions in the Companies Act have been made applicable to LLPs as well, thus making mockery of the objective of flexibility and lesser regulation.
LLPs have been made subject to control of the Registrar of Companies (RoC).
Important definitions in the Bill, such as those concerning body corporate, financial year, Registrar, etc., have been taken from the Companies Act.
The National Company Law Tribunal (NCLT), having jurisdiction over companies under the Companies Act, shall have jurisdiction over LLPs too.
As regards appeals, Sections 10FQ, 10FZA, 10G, 10GD, 10GE & 10GF of the Companies Act shall be applicable to LLPs too.
LLPs, like companies, shall have perpetual succession.
Like in public companies, there is no restriction on the number of members in an LLP.
LLP and I-T
Once LLPs start functioning, the issue of their taxation will arise. There is a view that LLPs should be considered a conduits for partners and no income-tax levied on them. Their incomes should be distributed amongst the partners and assessed in the hands of the latter.
The Bill, however, is silent on this aspect. The Naresh Chandra Committee says that, "the LLPs should be governed by a taxation regime that taxes the partners as individuals, rather than taxing the LLP itself, that is, the LLPs should be treated in the same manner as the firm under the tax laws."
This is, however, contrary to the system of taxation of firms under the I-T Act. At present, a partnership firm pays tax on its profits after deduction of business expenditure, salaries and interest to partners. Partners are then taxed on their salary and interest, whereas their share in the profits of the firm are exempt. Firms, thus, are not exempt from tax.
As per the first schedule of the LLP Bill, no partner of an LLP shall be entitled to remuneration for being involved in the business/management. This, of course, will apply only if there is no stipulation regarding remuneration in the agreement constituting LLP. Hence, if no remuneration is to be paid, its allowance in the hands of the LLP and taxation in the hands of the partners shall not arise.
Since the LLP is conceived of as a company, it would only be fair and logical to tax an LLP like a company and ignore the existence of partners such as shareholders. If the partners receive any income, such as interest from the LLP, it would be taxable in the hands of the partners. In any case, the I-T Department will have to take a decision on this once the Bill becomes an Act.
T. N. Pandey (The author is a former chairman of CBDT.)