Company affairs ministry has pitched for LLPs to be at par with partnership firms for taxation; MoF wants them taxed as corporates
The finance and company affairs ministries are at variance over formulating the taxation policy for limited liability partnership (LLP) firms. While the MCA has pitched for LLPs to be treated at par with partnership firms for purposes of income tax and capital gains tax, the MoF wants them to be taxed as corporates.
Constituents of a partnership firm are individually liable to income tax on their share of the profits of the trade or profession that the firm carries out.
This is consequent to the treatment of the property of the firm as that of the partners, instead of the firms. Similarly, the assets of the firm is dubbed as those of the partners, to compute the capital gains tax. As for a corporate entity, the profits and assets are reckoned to be that of the entity and taxed accordingly.
Official sources said the two ministries have already corresponded between them on their disagreement. The company affairs ministry wanted the issue to be resolved before it finalized the draft LLP Bill, they added.
Waiting to explode
Company affairs ministry wants relevant tax policies enshrined in the LLP Act, instead of the I-T Act saying it would ensure a policy conducive for growth
Finmin feels the model would infringe upon Article 77 of the Constitution dealing with
the ministry's freedom to determine tax rates
The sources said that the tax issues pertaining to LLP might create a row before being settled, as the MCA would also pitch hard for the relevant tax policies to be enshrined in the LLP Act, instead of the income-tax Act. This, the ministry believes, would ensure a stable policy conducive for growth. The finance ministry, however, is disinclined to accept the model which, it feels, would infringe upon Article 77 of the Constitution dealing with allocation of businesses to ministries and the ministrys freedom to determine tax rates.
The company affairs ministry envisages LLP to be a new legal entity which has the twin advantages of the organisational flexibility and tax status of a partnership firm even as the partners are unburdened from unlimited liability. The idea is that the services sector would get a growth impetus. Each LLP partner would have a liability, disengaged from the consequences of others faults, negligence even as the firm would have perpetual succession.