Tuesday, July 10, 2007

Tax on Limited Liability Partnerships

We all know that India is experimenting with LLP (Limited Liability Partnerships). Let’s dig deeper and take a look at it.

Various committees and expert groups have, from time to time, recommended introduction of LLP legislation in India. The Abid Hussain Committee (1997) has recommended this legislation in the context of SSIs. The Naresh Chandra Committee on Regulation of Private Companies and Partnerships (2003) and Dr. Irani Committee on New Company Law (2005) have also made recommendations for a separate LLP Legislation.

Therefore, the Ministry of Company Affairs has introduced a Bill, namely Limited Liability Partnership Bill, 2006 in Rajya Sabha on 15th December, 2006. The Bill is under consideration of the Standing Committee on Finance.

The taxation of these entities instead of the individuals which is being considered, may lead to a higher tax burden for the partners and dual taxation of foreign partners. This will lead to a setback for cross-border partnerships on two counts.

Firstly, if the LLP itself is taxed, the foreign partner may not be able to claim the benefit of any double taxation avoidance deal which his home country may have struck with India.

Secondly, if the LLP generates income here as well as abroad, the entity will have to pay tax here even for the income that is generated abroad.

Taxing the individual partners will do away with both these disadvantages. In that case the Indian partner would pay tax only for whatever income he gets from the partnership’s activities here, while the foreign partner will not pay any tax here.