LIMITED LIABILITY

PARTNERSHIP
- AN INSIGHT TO TAXATION

PRESENTED BY SIDDHARTH GUPTA

BCOM(M)
ROLL NO. 609
PROJECT GUIDE - PROF. S.SIRCAR
1

Content

Introduction
Difference between Partnership & LLP
Formation of LLP
An Insight to Taxation of LLP
CASE STUDY
CONCLUSION

The concept of Limited Liability Concept under

the roof of Partnership will bring a lot of
Diversity.

History

Introduced in India by way of Limited Liability

Partnership Act, 2008
It came into efect via notifcation dated 31-032009.
Introduced via Budget 2009-10 in Income Tax Act,
whereby it was made applicable that LLP will be
treated as Partnership frms for the purpose of
Income Tax and will be taxed like a partnership frm.

Objectiv
es

To have an overview about the global scenario of

Limited Liability Partnerships.
To empirically examine the tax structure of Limited
Liability Partnerships.
To empirically examine the tax implications
associated with the conversion of a Company/Firm
into a Limited Liability Partnership.

.An Introduction

Limited Liability Partnership

Limited Liability Partnership

.Overview

It combines the advantages of both the

company and Partnership into a single
form of organization. In an LLP one
partner is not responsible or liable for
another
partners
misconduct
or
negligence.

In this type of partnership all partners

have a form of limited liability for each
individuals
protection within the
partnership, similar to that of the
shareholders of a corporation.

However
unlike
corporate
shareholders, the partners have the
right to manage the business directly.
An LLP also limits the personal liability
of a partner for the errors, omissions,
incompetence, or negligence of the
LLP's employees or other agents.

As per the Budget 2009-10, LLP will be

Content

Introduction
Difference between Partnership & LLP
Formation of LLP
An Insight to Taxation of LLP
CASE STUDY
CONCLUSION

LLP-vs.-PARTNERSHIP FIRM

.Comparison

Maximum Partner requirement is same. However, in case of Partnership

frm maximum partners are 20 which is unlimited in case of LLP.

LLP are separate legal entity and its registration is mandatory unlike the
erstwhile Partnership frm. The name of the LLP has to be approved by
the registrar and must have LLP as suffix.

Liability is limited in case of LLP as compared to the Partnership form of

business.

Partnership form of business is governed by the provisions of Indian

Partnership Act, 1932 whereas the LLP is governed by the provision of
Limited Liability Partnership Act, 2008

An LLP can hold the property in its name, however a partnership frm
cannot do the same.

Minor cannot become a partner in an LLp which was however allowed in

the erstwhile Partnership form of business.
6

Content

Introduction
Difference between Partnership & LLP
Formation of LLP
An Insight to Taxation of LLP
CASE STUDY
CONCLUSION

Limited Liability Partnership

.Formation

Deciding the
partners and
designated
partners

Filing of
Incorporation
Documents

Obtaining
Certifcate of
Incorporation

Obtaining DPIN

Obtaining
Digital
Signature

Name
Availability

Registration on
LLP portal

Drafting of LLP
Agreement

Content

Introduction
Difference between Partnership & LLP
Formation of LLP
An Insight to Taxation of LLP
CASE STUDY
CONCLUSION

Limited Liability Partnership

.An Insight to Taxation

Section 5 of the Income Tax Act,

1961 describes the scope of
income that would be subject to
taxation in India based on the
residential status of the taxpayer.
A partnership is taxable entity
under the Income Tax Act. Once,
the partnership is taxed on its
income, then, the same income is
not taxed separately in the hands
of the person, who is a partner in
such a frm,
Finance incorporated the taxation
scheme of LLPs in the Income Tax
Act on the same lines as applicable
for general partnerships i.e. tax
liability would be attracted in the
hands of the LLP and tax

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Limited Liability Partnership

.Taxation Aspects

Tax
Planning of
LLP

Pros and
Cons of LLP
being taxed
as Firm

Conversion of
Company
into LLP

LLP Taxation at a
glance
11

Limited Liability Partnership

.Tax Planning of LLP

FACTS
FACTS

Eligibility

A certifed copy of LLP agreement and if a change take place in the constitution
must be accompanied in the ROI of the LLP of the P.Y. Notices of assessment
must be complied without failure.

Entity

LLP incorporated in India Taxed as Firm as in Section 2(23)(i)

LLP incorporated outside India Taxed as Company

Rates

Tax Rate
3%

30% , Surcharge Not applicable, EC & SHEC -

CHAPTER
CHAPTER XII-BA
XII-BA -- AMT
AMT

Section 115JC vide Finance Act 2012 shall be applicable not only on LLPs but certain other person other than
company.
The Section starts with an non obstinate clause that where the regular income-tax payable for a previous year by
a LLP in less than the alternate minimum tax payable for a P.Y. the adjusted total income shall be deemed to be
the total income of the limited liability partnership for such previous year and it shall be liable to pay income-tax on
such total income at the rate of eighteen and one-half per cent.
Section 115JC(2) states the meaning of Adjusted total income as under

Adjusted total income referred to in sub-section (1) shall be the total income before giving effect to
this Chapter as increased by
(i) deductions claimed, if any, under any section (other than section 80P) included in Chapter VI-A
under the heading "C.Deductions in respect of certain incomes"; and
(ii) deduction claimed, if any, under section10AA.

Section 115JD deals with tax credit available for alternate minimum tax which are as follows :
Tax Credit for an assessment year shall be the excess of AMT over the regular incometax payable of that year. Such credit is allowed to be carried forward not beyond the
tenth A.Y. succeeding the A.Y. in which tax credit becomes allowable.
If in any A.Y. the regular income-tax exceeds the AMT, the tax credit shall be allowed to
be set of to the extent of the excess of regular income-tax over the AMT and the

12

Tax Planning of LLP

.Continued

Example
Example

ADJUSTED TOTAL INCOME

CASE LAW

Regular total income of LLP is nil. Its gross total income

is Rs. 2,00,000 (after setting-of losses, etc.). It is
eligible to the deduction under Part C of Rs. 5,00,000.
However, only Rs. 2,00,000 is claimed, as it can be
claimed only to the extent of gross total income. In this
case, to determine Adjusted Total Income, Regular
total income should be increased by Rs. 2,00,000, i.e.,
the amount claimed and not Rs. 5,00,000, being the
ALTERANTE
MINIMUM
amount eligible for deduction.

TAX

Particulars

In this regard reliance is placed on

the decision of Apex Court in the
case of Malayala Manorama Co.
Ltd. vs. CIT [2008] 169 Taxman
471 (SC) wherein it has been held
that the actual amount of the
deduction
considered
for
computing regular total income
needs to be deducted.
Assessment Year

2012-13

2013-14

Regular Total Income

1,000

1,000

Adjusted Total Income

5.000

1,100

5,000*18.5% = 925

1,100*18.5% = 203.50

1,000*30% = 300

1000*30% = 300

925-300 = 625

300-203.5 = 96.50

925 under MAT

203.50 under normal provision

625

625 96.50 = 528.50

AMT Payable
Regular Income Tax Payable
Amount of credit available as per section
115JD(2)
Credit allowed to be set off u/s 115JD(5)
Amount of tax to be paid
Balance of credit carried forward

As per section 115JD(4) tax credit shall be allowed to be carried forward not beyond the
tenth A.Y. immediately succeeding the A.Y. 2012-13. In the instant case it shall be carried
forward upto A.Y. 2012-13+10 = A.Y. 2022-23.
If the amount of regular income-tax or the AMT is reduced or increased as a result of any
order the amount of tax credit allowed under this section shall also be varied accordingly.

Limited Liability Partnership

.Pros and Cons of LLP being taxed as firm

ADVANTAGES

Lower tax rate of 30.90%

vis-a-vis 32.45%
No DDT on its proft
distributions
Reconstitution of
Partnership No impact on
carry forward of losses
No deemed dividend
taxation
Wealth tax provision not
applicable
No MAT LLPs taxable
under AMT

DISADVANTAGES

May not qualify for tax

holiday/
incentive
provisions when restricted
to company certain
presumptive tax
provisions can be invoked
only by a foreign company
and do not apply to an
LLP. Following are some
incentive not available

200% weighted
deduction
on
expenditure on In
House
scientifc
research

Tax
neutral
amalgamation/demerger
of
companies
possible

Limited Liability Partnership

ISSUE
ISSUE

.Conversion of Company into LLP

The issue arised in course of transfer under

normal provision conversion would attracts
levy of capital gains tax. Similarly, carry
forward of losses, unabsorbed depreciation
and certain other allowances is not available
to the successor LLP.

BIG
QUESTION

Is there no
beneft for
conversion

Section 56 & 57 of the LLP Act 2008

Private
PUBLIC
Co.
Co.
Co.
Delisting
LLP

SOLUTION

Conditions
Conditions

Finance Act 2010, inserted section 47(xiiib)

which stated that any transfer of capital
asset or intangible asset or shares will not
be regarded as transfer for the levy of
gains
tax u/s
the act. which
However,
However following conditions are to be met forcapital
section
47(xiiib)
to45
beof
efective
this is subject to certain condition.
are :

All assets and liabilities of the company immediately before the conversion
become the assets and liabilities of the LLP;
All the shareholders of the company immediately before the conversion
become partners of the LLP in the same proportion as their shareholding in
the company;
For conversion, shareholders of the company do not receive any
consideration, directly or indirectly, other than share in proft and capital
contribution in the LLPs
The shareholders of the company continue to be entitled to receive at least
50 per cent, in aggregate, of the profts of the LLP for a period of 5 years from

Limited Liability Partnership

.Conversion of Company into LLP

Other Benefits on Succession
Fifth proviso to section 32
provides for computation of
depreciation allowance on
conversion. the amount of
depreciation shall be apportioned
the predecessor and the
successor in the ration of number
of days for which assets were
used by them.

PARTICULARS
Proft Before Tax
Less: Income Tax
Proft After Tax
Less; Transfer to Reserves
Less:
Dividend

Section 43(6) of the Act defines

written down value of assets for
claim of depreciation. The cost of
acquisition of capital assets for
the successor LLP will be deemed
to be the written down value for
the predecessor company on the
date of conversion.

Distribution

Tax

COMPANY
100.00
32.45
67.55
6.75
8.50

LLP
100.00
30.90
69.10
-

52.30

69.10

40.95

30.90

16.22%
Dividends

Proft

available for distribution

Total Tax

On private company or unlisted

public company is succeeded by a
Tax Impact
LLP fulfilling the conditions laid
down in the proviso to clause
10.10%
(xiiib) of section 47, amount of
deduction under section 35DDA
unamortized in the hands of the
predecessor
company
shall 72A(6A)
be
Further, as
per section
carry forward and set-off of business loss and
allowed
to
the
successor
LLP
as
unabsorbed depreciation by the successor LLP which fulfills the above mentioned
would
have been
the
conditions
of allowed
section to
47(xiiib)
of the Act are allowed
company, had the conversion not

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Content

Introduction
Difference between Partnership & LLP
Formation of LLP
An Insight to Taxation of LLP
CASE STUDY
CONCLUSION

17

Case Study
PROFIT
&
LOSS
ACCOUNT Particulars `
Turnover
Other Operating Data
Income

.Analysis
(Rs. In thousands)
X CO.

X LLP

2,48,793
4421
2,53,214

2,48,793
4421
2,53,214

1,09,242

1,09,242

7,103

7,103

75,761

75,761

1.956
190
58,962
-

1.956
190
58,962
250
28,800

58,962

29,912

18,260
40,682

9,240
20,672

FINANCIALS
FINANCIALS

Operating Expense :
Staf costs
Depreciation, Amortization and Impairment
Other operating expenses
Finance Cost :
Interest payable
Other Similar charges
Profit before appropriation
Interest on Partners capital
Partners remuneration
Profit after appropriation before
taxation
Taxation
Profit after taxation

Case Study
BALANCE SHEET
Particulars
Fixed Assets
Investments

.Continued
(Rs. In thousands)
X CO.
X LLP
17,189
17,189
-

FINANCIALS
FINANCIALS

Current Assets :
Debtors
Amount due from members
Cash at Bank and in Hand

1,44,306
18,366
4,576

1,44,306
18,366
4,576

1,67,248

1,67,248

62,041

62,041

2,141

2,141

64,182

64,182

1,03,066
1,20,255

1,03,066
1,20,255

14,739

14,739

47,971
20,543

47,971
20,543

Current Liabilities :
Creditors : Amount falling due within
one year
Amount due to members
Net Current Assets
Total Assets less Current Liabilities
Non Current Liabilities :
Creditors: Amount falling due after one
year
Revolving capital loans
Provision for liabilities & charges

Case Study
COMPUTATION

TAXATION
TAXATION

Particulars
Income from Business Profession
(Note1)
Gross Total Income
Taxable Income
(A)
Tax on (A) above @ 30%
Add : EC @ 2%
Add : SHEC @ 1%
Total Tax Liability under
normal provision
(i)
Book Profit for MAT (B)
Income for AMT
(C)
MAT on (B)
(ii)
AMT on (C)
(ii)
Tax payable (Higher of (i) or
(ii)
Savings in Rs.

.Continued
(Rs. In thousands)
X CO.

X LLP

58,962

29,912

58,962
58,962
17,960
350
190

29,912
29,912
8,970
180
90

18,260

9,240

58,962
-

29,912

11,235

5,700

18,260

9,240

18,260-9240 = 9,020

Tax Savings
INR 90.20 lacs.
Effectively
49,40%

Case Study
NOTE 1
TAXATION
TAXATION

Particulars
Proft as per P&L A/C
Add : Items to be added
separately
Interest on partner capital
Partners remuneration
Depreciation

.Continued
(Rs. In thousands)
X CO.
X LLP
58,962

7,103

29,912

250
28,800
7,103

ANALYSIS
ANALYSIS

Less: Expenses allowable:

Partners
28,800
Remuneration(Note2)
Interest on Partners Capital
250
Depreciation
as perthat
I.T. Act,
It can be found
LLP has claimed
an additional
7,103
7,103
1961
deduction of Rs. 29,050,000 from is proft before
Income
from Business
appropriation.
Hence, or
it has been
able to save
a
58,962
29,912
Profession
Income Tax @ 30% on this portion of Rs.
29,050,000. The same is taxable in the hands of
the partners at a lower rate for individual
assessee.
Further, if X CO. want to distribute its profit
to the shareholders in the form of dividend it
has to pay a Dividend Distribution Tax @
15.45%. However the same has not to be
paid by an LLP when distributing the profits.

NOTE 2
Particulars
On frst Rs. 3,00,000/Higher of
Rs. 1,50,000/- or 90% of Rs.
3,00,000/On balance Rs. 5,86,62,000
Eligible Remuneration
Actual remuneration
Allowable remuneration (lower of
the above)

Amount
(inRs.)
2,70,000
3,51,97,200
3,54,67,200
2,88.00,000
2,88.00,000

It is observed in the given case

study that the taxable income of X
Co. is Rs. 5,89,62,0000 while that of
X LLP is Rs. 29,912,000 at the same
level of turnover. This diference in
the taxable income can be justifed
on the grounds that, frstly, a
Limited Liability Partnership is
entitled to an additional deduction
of Partners Remuneration and
Interest on Partners. Hence, the
same can be claimed as expense by
the LLP.

Content

Introduction
Difference between Partnership & LLP
Formation of LLP
An Insight to Taxation of LLP
CASE STUDY
CONCLUSION

22

LLP-vs.-PARTNERSHIP FIRM

.Conclusion

LLP is a comparatively new form of business organization in India and various

opportunities exist with regard to its formation and functioning.

On the horizon of business matrix, a new star is now sited. While ease in
operations of partnership and armor of limited liability is provided under a
new format of business entity i.e. Limited Liability Partnership: (LLP).

L For the purpose of taxation, the Income-tax Act, 1961 (the Act) equates LLP
with the partnership frm [section 2(23)]. Therefore, no separate tax rate or
legal provisions are prescribed for LLPs. Tax rate prescribed for frms of 30%
is automatically applicable and similar is in case of the rest of the provisions.

On account of the obvious advantages of LLP medium for conducting

business owned by multiple entities, it will be fancied by many. The new
ventures will embrace to this ownership platform; however, the existing ones
who desire to convert to this new model shall also be governed by the
conversion provisions of LLP.

The amendments giving concession on conversion of company into LLP, are

welcome. However, these will be of little utility, unless suggestions made in

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LLP-vs.-PARTNERSHIP FIRM

.Limitation

Since, the project is entirely based upon the hypothetical data,

the direct observation is literally impossible.

The sources of secondary data with regard to fnancial analysis

of a Limited Liability Partnership in India are very limited due to
lack of popularity of this type of business form, hence analysis
of tax implications on the basis of real life data was not possible.

The Income Tax Act, 1961, is too vast and it is not possible to
cover each and every provision in the available short span of
time.

Since, the act itself has not precisely declared provisions about
the taxation of Limited Liability Partnership in certain cases,
thereby, there may arise a contradiction of opinion.

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