Limited Liability Partnership - Essential Summary - Part 2

In the series of LLP governance structure in India, in this article we will see the taxation structure of LLPs in India, and few points about how an MNC can effectively use LLP in India as an effective vehicle.

3.Taxation of LLP in India

• LLP’s will be treated as Partnership Firms for the purpose of Income Tax w.e.f assessment year 2010-11.
• Profit will be taxed in the hands of the LLP and not in the hands of the partners.
• Income is taxed at a flat rate of 30% + 3% education cess.
• No Minimum Alternate tax or Dividend Distribution tax is applicable.
• However, Alternate Minimum Tax is applicable.
• AMT is levied at 18.5% plus surcharge on adjusted total income of LLP.

Deductions to LLP

LLP can claim the following deductions as expenses:

• Interest paid to partners, provided such interest is authorized by the LLP Agreement.
• Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual.
• Only a working partner can get a salary. No sleeping partner can get a salary. if a LLP is paying salary to a sleeping partner then it is not allowed.
• LLP can claim interest, on capital to partners, maximum to the extent of 12% p.a. (simple interest). Any extra interest will be dis-allowed.[section 40(b)]
• The remuneration paid to such working partners must be authorised by the LLP Agreement and the amount of remuneration must not exceed the given limits.

• Limits of Remuneration to Partners:
• The Income Tax Act prescribes the ceiling limit upto which any payment of salary, bonus, commission or remuneration will be allowed as deduction for income of LLP, the limits of remuneration are outlined below:
• On First Rs 3,00,000 of book profit or in case of loss Rs 1,50,000 or at the rate of 90% of the book-profit, whichever is more;
• On the balance of book profit at the rate of 60%. 

Special provisions

1. Capital Gain on conversion of Company into LLP will be exempt (assets as well as shares) from tax, if following conditions are complied with.

• all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;
• all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;
• the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;
• the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;
• the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and
• no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion. [Section 47(xiiib)]

2. A company having foreign investment, engaged in a sector where foreign investment up to 100 percent is permitted under the automatic route and there are no FDI linked performance conditions, may be converted into a LLP under the automatic route.

3.U/s. 72A on conversion, the successor LLP, will be allowed to carry forward and set off of accumulated loss and unabsorbed depreciation allowance. However, if the conditions laid out in section 47(xiiib) are not complied with then the losses allowed as set-off will be deemed to be income of the year in which such non-compliance occurs.

4.If the conditions relating to 47(xiiib) are not complied in any year then the capital gains exempted earlier shall be deemed to be income of such year (Section 47A).

Benefit of amortisation of expenses u/s. 35DDA will be available to resultant LLP in case of conversion of a company.

5.Cost of acquisition of rights in LLP by the partners on conversion from company shall be taken as the cost of acquisition of the share in the company (Section 49(2AAA)).

6. Although presumptive scheme of taxation (tax on 6%/8% of turnover) is available to partnership firms. LLP is not covered under presumptive taxation under section 44AD.

7. Partners are jointly and severally liable for the taxes outstanding at the time of liquidation of llp unless he he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the limited liability partnership  (Section 167C).

8. MAT credit of a company converted to a LLP can not be carried forward to the LLP u/s. 115JAA.

In the case of conversion of company into LLP the cost of assets for llp shall be taken as the WDV of the block of assets of the company (Section 43).

9. Tax audit: LLP required to get its books of accounts audited by practicing Chartered Accountant if its turnover crosses limit for FY 2022-23 under business is Rs. 10 Cr with cash transaction limit and in case of Professional Services sales Rs. 50 lac.