New Taxation Norms To Hit Partnership Firms

New taxation norms announced in the 1997-98 Union budget are likely to make partnership firms an unattractive route for exploring business opportunities.

The budget has broken with tradition by making the tax liability of partnership firms higher than that for individuals. Both companies and partnership firms will now be taxed at 35 per cent, while the highest tax slab for individuals is only 30 per cent.

The Indian Partnership Act defines a partnership as: relationships between persons who have agreed to share the profits of business carried on by all or any of them acting for all. Hence, Indian taxation norms had hitherto required partnership firms to pay taxes at rates equal to the highest slab laid down for individuals.

 

Argues tax expert Rathin Datta, senior partner of Price Waterhouse Associates: Companies have so long been subjected to higher rates of taxes compared to individuals and firms simply because they enjoy an immunity. Unlike firms, their liability is restricted to the paid-up equity, justifying a higher tax levy. Partnership firms which account for the bulk of Indias unorganised trade may be especially hard-hit. Although exporters have been spared from the MAT net this time, the small players will be at a disadvantage vis-a-vis big players, argue tax experts.

Some experts fear that marginal firms might resort to concealing their partnership deeds and consent to be taxed as an individual, which would reduce their tax liability by a whopping 5 per cent.

Worldwide professionals like solicitors and CAs are barred from floating companies on the ground that such a move would restrict their liabilities, which might hurt the interests of their clients.

Thus, CA firms and solicitors firms are floated to achieve economies of scale, without limiting their liabilities.