Tax treatment for limited liability entities yet to be decided
April, 08th 2008
Even as the limited liability partnership (LLP) law is soon to become a reality, the issue of tax treatment for such entities has not yet been finalised.
The Ministry for Corporate Affairs (MCA) has left it to the Finance Ministry to take a final call on the contentious issue of tax treatment for LLP firms.
A senior MCA official said that We will give a broad framework of LLP law and let the Finance Ministry decide on the kind of taxation treatment for such entities . He added that the tax regime should be such that it makes LLP an attractive body, as the success of such a concept would depend to a large extent on it being a tax-efficient structure.
There are three options available for the relevant authorities to consider for taxing such entities, he pointed out. These are either to tax LLPs as a company, or adopt the pass through concept where individual partners will be taxed and not the firm. There is also the concept followed in the US where it is left up to the firm to decide on how it wants to be taxed as a company or by pass-through method.
The Limited Liability Partnership Bill, 2006, is silent on issue, as the matter is in the domain of Finance Ministry, the official said. The Ministry, after taking into consideration the recommendations of the Standing Committee, plans to pursue the Bill in the second half of the Budget session.
A LLP is a corporate form distinct from a joint stock company set up under Companies Act as well as a partnership firm set up under the Partnership Act.
The basic difference between a LLP and a joint stock company centres on the fact that while the internal governance structure of a company is regulated by statutes, for an LLP it would be by way of a contractual agreement among partners.
At the same time, the LLP provides a shield to the partners from the joint and several liabilities would arise under the traditional partnership form.
The Standing Committee on Finance which had considered the Bill had recommended that there is a need to provide flexibility to entrepreneurs in opting for taxation structure that is relevant to the type and size of their business.