Large business entities willing to convert into Limited Liability Partnerships (LLPs) will have to wait for some more time with the government saying that it would consider raising the limit for capital gains tax exemptions as part of the Direct Taxes Code.
“We have started with a turnover limit of Rs. 60 lakh. It is only a starting point. It will be raised once we implement Direct Taxes Code (DTC) next year,” said a senior Income Tax official.
To encourage professionals to opt for LLPs, Finance Minister Pranab Mukherjee in his budget proposed to exempt transfer of assets to LLP from capital gains tax provided turnover of private or unlisted company is below Rs. 60 lakh.
“The turnover limit of Rs. 60 lakh is restrictive and will not encourage larger professional firms to covert into LLPs. It should be raised to a reasonable level. The objective should be to encourage multi—dimensional firms which can have partners from disciplines like law, accountancy, engineering, medicine etc,” said Diljeet Titus, senior partner of law firm Titus and Co.
Expressing similar opinion, M. Lakshminarayanan, national head of tax, Deloitte, said, “Though the exemption to LLPs on capital gains tax is a welcome step. It (turnover limit of Rs 60 lakh) will discourage large scale firms to enter this form of business. LLPs may not be able to achieve the scales of LLPs in developed countries“.
The government proposes to introduce DTC, which will replace the Income Tax Act, from 2011—12.
“We will seek clarification on the LLP issue in our post—budget memorandum to the Finance Ministry. We will also be proposing certain amendments for making LLPs more viable”, said C. Ramaswamy, vice-president of the Institute of Chartered Accountants of India (ICAI).
The effort, Titus said, should be made to have Indian entities competing with likes of KPMGs, PwCs and large American law firms which operate as LLPs.
Although the government notified the LLP Act in April 2009, the response from the professionals has by and large remained lukewarm as not many entities have shown interest in adopting the LLP structure.
According to official data, only 584 entities have registered themselves as LLPs in the country till January 11, 2010. The number looks very small when compared with the fact that more than 65,000 companies were incorporated during 2007—08.
LLP, which is a hybrid between companies and partnership firms, allows having unlimited number of partners with liability limited to the extent of the stake held by the partners.
Some of the major concerns pertain to tax liability in case of conversion, financial liabilities of partners, penal provisions, winding up of LLPs etc.