LLP - Taxation

7:38 PM
LLP is a new corporate form that enables professional expertise and
entrepreneurial initiative to combine, organize and operate in an
innovative and efficient manner. In India, this need has long been
recognised for businesses which may require a framework that provides
flexibility suited to requirements of service, knowledge and technology
based enterprises. Services sector is playing a major role in the
national economy and there is a growing diversity in the range of
services being offered. The services sector also finds this form very
useful.
2. Government had introduced the Limited Liability Partnership Bill,
2006 in the Rajya Sabha on 15th December, 2006. It was later referred
to the Department Related Parliamentary Standing Committee on Finance
for examination and report. The Committee submitted its recommendations
in its report to both Houses of Parliament on 27th November, 2007.
Keeping in view the recommendations made by the Standing Committee and
other relevant inputs, the Government had finalized the LLP Bill, 2008.
Based on such report the Ministry of Corporate Affairs revised the LLP
Bill and the revised LLP Bill, 2008 was introduced in the Rajya Sabha
on 21st October, 2008. This was passed by the Rajya Sabha on 24th
October, 2008. The Bill was passed by Lok Sabha on 12th December, 2008.
The President gave assent to this Bill on 7th January, 2009. 3. The
rules in respect of registration and operational aspects under the LLP
Act, 2008 viz. LLP Rules, 2009, were issued on 1st April, 2009. The
rules in respect of conversion of a partnership firm, a private company
and an unlisted public company into LLPs were made effective w.e.f.
31st May, 2009. The Government has also launched a website namely,
www.llp.gov.in on 1st April, 2009 for operationalization of various
processes provided under the LLP Rules, 2009. The rules under LLP Act,
2008 in respect of winding up and dissolution of LLPs are also under
preparation and would be prescribed shortly. Taxation of LLPs 4. Since
the taxation related matters in India are provided under Tax Laws, the
taxation of LLPs was not provided in the LLP Act. The Finance Bill,
2009 has made provisions in this regard, pursuant to which the taxation
scheme of LLPs has been proposed to be introduced in the Income Tax
Act. It has been proposed to tax LLPs on the lines similar to general
partnerships under Indian Partnership Act, 1932, i.e. taxation in the
hands of the entity and exemption from tax in the hands of its
partners. The Finance Bill, 2009 has accorded a “limited liability
partnership” and a general partnership the same tax treatment.
Consequent changes in the Income-tax Act, 1961 like (i) the word
‘partner’ to include within its meaning a partner of a limited
liability partnership, (ii) the word ‘firm’ to include within its
meaning a limited liability partnership and (iii) the word
‘partnership’ to include within its meaning a limited liability
partnership as these terms have been defined in the Limited Liability
Partnership Act, 2008 have also been proposed in the Finance Bill,
2009. 5. It has also been proposed in the Finance Bill, 2009 that the
designated partner shall sign the income tax return of an LLP, or,
where, for any unavoidable reason such designated partner is not able
to sign the return or where there is no designated partner as such, any
partner shall sign the return. The Finance Bill has also proposed that
in case of liquidation of an LLP, every partner will be jointly and
severally liable for payment of tax unless he proves that non-recovery
cannot be attributed to any gross neglect, misfeasance or breach of
duty on his part. 6. The Bill further provides that as an LLP and a
general partnership is being treated as equivalent (except for recovery
purposes) in the Income-tax Act, the conversion from a general
partnership firm to an LLP will have no tax implications if the rights
and obligations of the partners remain the same after conversion and if
there is no transfer of any asset or liability after conversion. The
Finance Bill, 2009 also provides that if there is a violation of these
conditions, the provisions of section 45 of Income-tax Act shall apply.
The Finance Bill, 2009 has further proposed to make the amendments
effective from the 1st day of April 2010 i.e. assessment year 2010-11.
Ministry of Corporate Affairs, Government of India New Delhi, Asadha
19,1931, July 10, 2009

Sources:Press Information Bureau

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