TAXATION OF LIMITED LIABILITY PARTNERSHIPS (LLP’s)-
With the introduction of LLP Act 2008, LLP’s have come into existence, the government after a lot of discussion with tax guru’s has decided taxation of Limited Liability partnership’s in the following manner
LLP will be treated as Partnership firms for the purpose of Income Tax and will be taxed like a partnership firm.
Tax rate 30% flat tax rate( present corporate tax rate) + education cess 3% ( includes education cess 2% + Secondary and Higher Education Cess 1%)
No Minimum Alternate Tax & Dividend Distribution Tax
Any form capital gains arising out of sale of assets by the LLP will be taxable under sec. 112
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)
- Make Deductions : 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. Any payment of remuneration in excess of the limits prescribed will not be allowed to deducted out of the total taxable income.
- Make adjustments on account of brought forward losses/ disallowances of interests 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.
- payment of remuneration in excess of the limits prescribed will not be allowed to deducted out of the total taxable income.
- Partners are allowed to claim only 12% P.A. Of simple interest on the invested capital. If the interest is higher than12% P.A. than income tax will be charged.
- Sleeping partners are not entitled to remuneration.
- Remuneration is calculated on the book profit which is calculated under sec 28 to 44D.
- The profit received by partner cannot be taxed,since the firm has already been taxed. The interest and remuneration is taxable when partners file their individual return.
- LLPs shall not be liable to Wealth Tax
- Designated Partners will be liable to sign and file the Income Tax return.
- Remuneration and Interest on Capital paid to partners will be taxable in partner‘s hands as ―Income from Business and Profession‖ to the extent these have been allowed as deduction in LLP‘s hands
- Remuneration to working partners allowed as deduction subject to compliance with the provisions of section 40 (b) and sectio Interest on capital can be paid to the partners of the LLP. It shall be allowable as a deductible expense n 184
- No taxable capital gain on conversion of general partnership firm into LLP
- Conversion of private companies /unlisted public companies into LLP‘s are not expressly exempted from capital gains taxation by the Act.