LLPs still best option for companies

Finance Minister Pranab Mukherjee’s decision to impose minimum alternate tax (MAT) on limited liability partnership (LLP) firms in the Budget may not deter corporate entities from shifting to this new legal framework.

Mukherjee’s move, seen as an attempt to stop the misuse of the LLP format to escape the tax burden by established business conglomerates, can instead reduce the attractiveness of the new format among emerging business groups, say experts. They want the government to propose two types of LLPs to distinguish between corporate LLPs and small LLPs and tax the former, while encouraging the latter through continued tax sops.

“LLPs were formulated to enable professionals to set up multi-skilled business ventures on a partnership format. However, it proved to be an attractive option for corporates to reduce their tax burden. By trying to plug this loophole, the government has reduced the attractiveness of LLPs,” a corporate consultant said.

The LLP Act, which came into effect in 2009, allows the formation of partnership firms that have features of both corporate bodies as well as traditional partnerships. The major advantage of an LLP is the limited liability of a partner which is directly proportionate to the shares he holds in the firm. The finance minister had announced 18.5 per cent MAT on LLPs from the next financial year. Corporate tax is levied at 30 per cent.

Corporate affairs ministry officials said they were aware of the possible impact of taxation on LLPs. The ministry is yet to take a firm view on the issue.

“For large conglomerates, there are several reasons for deciding the structure of their business entities. Tax advantage will not be the only reason,” said Jagannadham Thunuguntla, equity head, SMC Capitals Ltd.

According to him, exemption from payment of dividend distribution tax is still a major attraction for conglomerates to shift to the LLP format.

Pavan Kumar Vijay, former president of Institute of Companies Secretaries of India and managing director of consultancy firm Corporate Professionals, supported the need for two types of LLPs to ensure that tax advantage continues for new entrepreneurs or small players who are interested in taking the partnership route.

Subhash Lakhotia, a leading tax consultant said the LLP format still holds lot of advantages to small players. Despite the tax liability, one would see the formation of more LLPs, he said.

Till date, there are 4,168 LLPs registered in the country. Corporate ministry officials said conversions from other formats of business entities constitute a significant portion of this list.