To unlisted public companies, an attractive option could be the conversion to limited liability partnership (LLP), suggests G. Srinivasan Anand in ‘Taxation of LLPs’ (www.taxmann.com). “Conversion means a transfer of the property, assets, interests, rights, privileges, liabilities, obligations and the undertaking of the unlisted public company to the LLP in accordance with the Fourth Schedule (to the LLP Act, 2008),” he explains.
On the question whether such a conversion gives rise to taxable capital gains, the author’s view is in the negative. He draws strength from the ‘explanatory memorandum’ of the Finance Bill, 2009, which clarifies that conversion of general partnership to LLP shall have no tax implications if the rights and obligations of the partners remain the same after the conversion and there is no transfer of any asset or liability after conversion. “Interestingly, the Finance (No. 2) Act, 2009, has not amended Section 2(47) or Section 47 of the Income-Tax Act to incorporate the above clarification in the Act itself.”
A chapter titled ‘advantages of LLPs over companies’ lists these: No MAT (minimum alternate tax), no DDT (dividend distribution tax), and no taxation as deemed dividend under section 2(22)(e) in the hands of a partner of LLP.
“Partners can be paid interest on capital whether there is profit or loss unlike dividends which depend on profits. Interest to partners on their capital is deductible expense under Section 36(1)(iii) read with Section 40(b)(v) of the Act. This makes partners’ capital a cheaper source of finance than share capital,” Anand argues.
Trawling trade benefits
Looking back at India’s experience with the FTAs (free trade agreements) involving Thailand, Sri Lanka and Singapore, the Institute of Chartered Accountants of India notes that imports of certain products from these countries have injured our industries.
“Television industry injured under the Thai FTA, vanaspati/ edible oils/ copper under the Sri Lanka FTA and chemicals under the Singapore CECA (Comprehensive Economic Cooperation Agreement)…” Thus read the examples that the Institute cites in ‘Study on Benefits of Preferential Trade Agreements’ (www.icai.org).
It states that none of these countries had such industries prior to the implementation of the respective FTAs. “It is only during the course of the FTA negotiation/ period of implementation that these countries either built up capacities (many Indians also set up industries there to reap benefits), and there has been diversion of oil/ chemicals/ copper from hubs such as Malaysia and West African countries, and picture tubes from China and Korea to Thailand.”
The ICAI, therefore, suggests that to derive benefits from PTAs, it is necessary to study the chances of diversion of specific third country productions in violation of the ROO (Rules of Origin) norms, considering the many FTAs that the partner countries may already have.
The publication highlights some of the potential gains that corporates can reap by performing a cross-sectional analysis of FTAs. “Exporters from India can export duty free items to Bangladesh under SAFTA (the South Asian Free Trade Area) and re-route their exports further to EU (the European Union) claiming that the products are of Bangladesh (which enjoys preferential duty access to EU in certain product categories) origin where certain value addition processes are only done. Such cross-cutting FTAs are huge in nature. If the rules of origin clauses are properly followed, these re-exports are certainly to be accepted as legal.”