Taxation of LLPs
Limited liability partnership (LLP) is taxed on the same lines as partnership firms — this would mean taxation of profit in the hands of the entity, the partners will be exempted.
Taxation aspect of Limited Liability Partnership
Tax rate:
30% flat tax rate + 3% education cess
No Minimum Alternate Tax & Dividend Distribution Tax
Taxation scheme for LLP prescribed on the same lines as currently applicable for Partnership Firms, i.e. tax will be levied on LLP and Partners will be exempt from tax.
The definition of the terms ‘firm’, ‘partner’ and ‘partnership’ have been substituted so as to define in the context of an entity registered under the Limited Liability Partnership Act, 2008 in addition to the definitions in the context of a partnership formed under the Indian Partnership Act,1932.
In the case of LLP, the return of income shall be signed and verified by the designated partner and where for any unavoidable reason the designated partner is not able to sign the return of income or where there is no designated partner, by any other partner.
In the case of liquidation of an LLP, every person who is a partner of the LLP at any time during the previous year shall be jointly and severally liable for the payment of any unrecovered tax unless 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 LLP.
The ceiling limits of remuneration paid to the working partner of a partnership firm, which is allowed as deduction from income. For simplicity and administrative ease, the limits for professional and non-professional firms have been brought in uniformity.
The ceiling limits with effect are:
Book Profit |
Maximum deductible remuneration |
|||
On the first Rs. 300,000 of the book-profit or in case of a loss |
Rs. 150,000 or at the rate of 90% of the book-profit, whichever is more |
|||
On the balance of the book-profit |
At the rate of 60% |
Signing of Income Tax Return The designated partner shall be responsible for signing the income tax return of LLP, where for unavoidable reasons, such designated partner is not able to sign the same or where there is no designated partner, any partner will sign the return.
No capital gain on conversion: LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provision of capital gain will apply.
Eligibility (section 184):
In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to satisfy the following criteria:
The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.
The individual shares of the partners are very clearly specified in the deed.
A certified copy of LLP Agreement must accompany the return of income of the LLP of the previous year in which the partnership was formed.
If during a previous year, a change takes place in the constitution of the LLP or in the profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be submitted along with the return of income of the previous years in question.
There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP.
LLP can claim the following deductions:
Interest paid to partners, provided such interest is authorised 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.
The remuneration paid to such working partner must be authorised by the LLP Agreement and the amount of remuneration must not exceed the given limits.
When section 184 is not complied with, the consequence is that no deduction towards interest and remuneration is allowed. This is the mandate of the section 185.
Steps for Computation of taxable income of a LLP:
Find out the firms income under the different heads of income, ignoring the prescribed exemptions. The heads of income are:
- Income from House Property
- Profits and Gains of Business or Profession
- Capital Gains
- Income from other sources including interest on securities, winnings from lotteries, races, puzzles, etc. ('Salary' income head is not included)
The payment of remuneration and interest to partners is deductible if conditions of section 184 and section 40(b) of the Income Tax Act are satisfied. Any salary, bonus, commission or remuneration which is due to or received by partners is allowed as a deduction from income of the partnership firm and the same is taxable in the hands of partners.
Make adjustments on account of brought forward losses/ disallowances of interests, salary, etc paid by firm to its partners. The total income so obtained is the "gross total income".
From the "gross total income", make the prescribed deductions and the balancing amount is the "net income" of the firm.