LLP PROFITS T( AXED) BY UNION BUDGET 2011

[Dr. Sanjiv Agarwal]

Who says tax policy and tax planning do not go hand in hand. Here is a live example of frequent tax policy change and failed tax planning without any wrong motives. When the concept of limited liability partnerships was introduced in India two years back, it was advocated that LLPs are a better, easier and tax friendly option, compared to corporate entities .

A LLP is typically a business entity which can be called hybrid form of a firm and a company . The Income-Tax Act provides for the same taxation regime for a limited liability partnership as is applicable to a partnership firm. It also provides tax neutrality (subject to fulfillment of certain conditions) to conversion of a private limited company or an unlisted public company into an LLP.

LLPs  are being taxed as a partnership firms and not as a corporate entity . Also LLPs are not subject to dividend distribution tax , as LLPs do not declare dividend, there being no shareholders. Presently (prior to Finance Bill, 2011), an LLP being treated as a firm for taxation, has the following tax advantages over a company under the Income-tax Act : -

• It is not subject to Minimum Alternate Tax ;
• It is not subject to Dividend Distribution Tax (DDT); and
• It is not subject to surcharge.

However, the Finance Bill, 2011 seeks to tax LLPs differently by bringing in special provisions by virtue  of a new chapter XII- BA in the Income Tax Act 1961. This chapter contains four sections, viz –

Section 115 JC Special provisions for payment of tax by certain LLPs

Section 115 JD             Tax credit for alternate minimum tax

Section 115 JE             Application of other tax provisions

Section 115 JF             Definition of accountant, alternate minimum tax, LLP and regular Income tax.

LLPs shall be subject to alternate minimum tax  @ 18.5 percent on the adjusted total income as per the income tax provisions (as against book profit in case of MAT) . However LLPs will be able  to enjoy credit of AMT to be carried forward for a period of 10 years, though in the first stance,  there will be an outgo of  18.5 tax. It may be noted that MAT is also  levied @ 18.5 % as the tax rate has been enhanced from 18% to 18.5 % in the budget.

 While regular income tax means the income tax payable for a previous year by a LLP on its total income as per the income tax provisions, alternate minimum  tax  (AMT ) shall be computed on the adjusted total income @ 18.5 percent. Adjusted total income shall be the total income as per income tax provisions in normal course (before giving effect to chapter XII- BA provisions ) as increased by deductions claimed under Chapter VI A (section 80A to 80 VV) in relation to deductions in respect of certain incomes and deduction under section 10AA in respect of newly established units in SEZ.

Adjusted total income and AMT shall be computed as under –

Total income (as per IT provisions for regular tax)                                 A

Add deductions under section 80A to 80 VV                                            B

Add deduction under section 10 AA                                                          C

                                                                                                                 ---------

Adjusted total income                                                                                   D

                                                                                                               -----------

AMT @ 18.5 on D                                                                                          E

                                                                                                              -----------

As per the proposed amendment, section 115 JD provides for credit  of AMT paid for a period of 10 years thus, The Credit for tax paid by a limited liability partnership under section 115JC shall be the excess of the alternate minimum tax paid over the regular income-tax payable. This shall be allowed to be carried forward up to the tenth payable. This shall be allowed to be carried forward up to the tenth assessment year immediately succeeding the assessment year for which such tax credit becomes allowable and shall be allowed to be set off for an assessment year in which the regular income-tax exceeds the alternate minimum tax to the extent of the excess of the regular income-tax over the alternate minimum tax.  Thus, AMT paid could be adjusted in ten following years but no refund is possible.

The concept behind LLPs was to encourage corporate culture in India by creation of LLPs by small or medium business entities, corporatisation of professional and consultancy  firms including chartered accountants, advocates etc so as to bring such professionals  at par with global peers and allow conversion of companies into LLPs  so as to reduce paper work and compliances.

Taxing LLPs now in the form of AMT is only an after thought with a view to garner more revenue. This will prove to be retrogatory for LLP culture which was gradually picking up.  Last fiscal,  some of the big business houses also formed LLPs or converted companies into LLP to their advantage accruing from  legitimate  tax planning. The new tax named alternate minimum tax shall be levied w.e.f.  1 April 2012 and thus shall apply to assessment year 2012-13 and in subsequent years. There will be no AMT levy in assessment year 2011-12

It is clear that Government’s intention to bring this amendment is to protect revenue which would otherwise have to be foregone in cases of conversion of companies into LLPs. While it is a jolt to such an idea, it is certainly a discouragement to promotion of corporate culture inIndiaand the very purpose for which LLP Act was legislated.