LLPs - Taxation & Conversion

TAXATION

47. What is the tax treatment being provided for LLPs?

Since the taxation related matters in India are provided under Tax Laws, the taxation of LLPs has not been 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. The Finance Bill, 2009 has proposed following regarding taxation of LLPs:-

  (a) LLPs to be taxed 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.

  (b) Consequent changes to be made 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

  (c) 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.

  (d) 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.

  (e) 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.

  (f) If there is a violation of these conditions, the provisions of section 45 of Income-tax Act shall apply.

  (g) These amendments are proposed to be made effective from the 1st day of April 2010 i.e. assessment year 2010-11.

CONVERSION OF OTHER ENTITIES INTO LLPs AND VICE VERSA

48. Whether other business entities like firm or company would be able to convert themselves into LLP?

Yes. The LLP Act contains enabling provisions pursuant to which a firm (set up under Indian Partnership Act, 1932) and private company or unlisted public company (incorporated under Companies Act) would be able to convert themselves into LLPs. Provisions of clause 58 and Schedule II to Schedule IV to the Act provide procedure in this regard. 

49. Whether LLP would be able to convert itself into company under the Companies Act, 1956?          

This would not be allowed under LLP Act. However, enabling provisions would be required to be made in the Companies Act for such conversion. Necessary action in this regard would be taken when Companies Act would be revised.

50. What is the treatment for stamp duty issues, both in terms of original incorporation and conversion from other business structures? Would there be any stamp duty exemption in case of conversion?

Since Stamp Duty is the subject reserved for the States, the LLP Act does not contain any provision for treatment of stamp duty issues. The stamp duty payable will depend upon the relevant Stamp Act prescribed by the State Government/Union Territory.

51. What are the requirements and consequence provided in the Act in respect of licences, permits, approvals etc obtained by a firm, private company or an unlisted public company, prior to its conversion into LLP?

It has been provided in the Act that on conversion of a firm/private company/unlisted public company into LLP, any approval, permit or licence issued to the firm/private company/unlisted company under any other Act shall, subject to the provisions of such other Act under which such approval, permit or licence was issued, be transferred in the name of converted entity viz LLP.

MERGER AND WINDING-UP OF LLPS

52. Whether two LLPs would be allowed to merge?

Provisions of section 60 to 62 of the Act provide for the manner in which compromises or arrangements including mergers and amalgamations involving LLPs shall be allowed.

53. What would be the provisions in respect of winding- up of LLPs?

It is proposed to provide the provisions and procedures required to be complied with when the affairs of an LLP are to be wound-up and dissolved, by enabling the Central Government to make rules under the LLP Act, 2008.

OFFENCES & PENALTIES AND JURISDICTION OF COURTS/TRIBUNAL

54. Broad provisions in respect of Offences and Penalties

Offences and penalties arising out of the non-compliance with the provisions of the Act have been defined along with the substantive provisions themselves.  However, for defaults/ non-compliance on procedural matters such as time limits for filing requirements, penalties have been provided for application in a non-discretionary manner, through the levy of a default fee for every day for which the default continues. Such default fee would be payable at the rate of rupee one hundred per day after the expiry of the date of filing (as prescribed in relevant provision) upto a period of three hundred days. Charging of such default fees would, however, be without prejudice to any other action or liability under the Act, in case the filing is made beyond the expiry of three hundred days.

The offences can be punished either (i) through payment of fine or (ii) through payment of fine as well as imprisonment of the offender. The Judicial Magistrate of the first class, or, as the case may be, the Metropolitan Magistrate shall have jurisdiction to try offences under the LLP Act.

Though most of the offences in the Act provide for punishment by way of charging fine, imprisonment has been provided for in respect of violations relating to

 (i) making by any person a false statement at the time of incorporation of LLP (ii) carrying on business of LLP with intent to defraud or for any fraudulent purposes and (iii) making, knowingly, false statements or omitting any material fact, in any return, documents etc under the Act. The offences which are punishable with fine only can be compounded by the Central Government, by collecting a sum not exceeding the amount of maximum fine prescribed for the offence.

Further, for defaults/non-compliance on procedural matters such as time limits for filing requirements provisions have been made for charging default fees (on daily basis) in a non-discretionary manner.

55. Whether offences would be compounded under the LLP Act? Whether any protection to whistle-blowers is being proposed in the Act?

The Act contains provisions empowering Central Government to compound any offence punishable with fine only by collecting a sum not exceeding the amount of maximum fine prescribed for the offence.
Enabling provisions have also been made in the Act in respect of protection to “Whistle Blowers”.