Industry seeks clarity on LLP firms' taxation

With no clear-cut guidelines specified for the conversion of companies into limited liability partnership firms (LLP), the LLP users, as well as industry bodies, have urged the finance ministry to provide more clarity on the taxation issue to encourage formation and conversion of LLPs. According to Karan Jasuja Associates, an LLP firm, "The Budget does not provide for any exemption for conversion of company into LLP. Therefore, such conversion will attract capital gains tax. The best option for taxation would have been 'pass through' status, where the LLP is not taxed at all rather the partners are taxed on their share of taxable income".

Industry chamber Assocham has urged the finance ministry to provide more clarity on the taxation aspect so that companies would be encouraged to convert into such business firms. "Since LLP will become a very popular vehicle for carrying out various business activities in the country, all aspects of taxation measures dealing with either incorporation or conversion of existing entities into LLPs needs to be addressed fully by the finance ministry," said Assocham.

According to another LLP firm, Corporate Professionals, "As on date, no capital gains exemption has been granted upon conversion of company into LLP. Therefore, till any such amendment in Income Tax Act, the transfer of all assets and liabilities of the company into LLP should be made at their book value at the time of conversion to avoid payment of any capital gain tax."

Even the ministry of corporate affairs, which was expecting thousands of LLPs to be registered in future is apprehensive about the response towards LLP under the current norms. Corporate affairs minister Salman Khurshid had earlier said, "The finance ministry did not consult us before fixing the rate of tax for LLP, which is 30.9%. We will have to wait for a year and see the response towards LLP."

LLP is a hybrid of partnership firms and companies. It is a separate legal entity and the partners have the advantage of being liable to the extent of their shareholding in the entity.

According to Assocham, "Absence of certain taxation provisions will only delay the formation and conversion of LLPs and thus growth of business activities."

It is not clear if lakh of partnership firms after converting into LLPs would be allowed to carry forward their minimum alternate tax refund and other liquidation benefits, Assocham said, adding the Finance Act, 2009-10, is yet to correct certain anomalies as regards the LLPs.