23 February, 2016

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6 Income Tax Provisions Applicable on Limited Liability Partnership (LLP)

6 Income Tax Provisions Applicable on Limited Liability Partnership (LLP)

The Limited Liability Partnership (LLP) is governed by Limited Liability Partnership (LLP) Act, 2008 and Limited Liability Partnership Rules, 2009. Limited Liability Partnerships (LLPs) are commercial vehicles which combine the features of partnership and company form of business .The concept of Limited Liability Partnership (LLP) has been introduced in India by way of Limited Liability Partnership Act, 2008 (notified on 31st March 2008). The Indian Partnership Act, 1932 shall not be applicable to LLPs.
For the purpose of the provisions of Income Tax Act, the Limited Liability Partnership (LLP) is treated as different from their partners. Income Tax Provisions applicable on LLP are explained below:

1. Tax Rate Applicable on LLP

A flat rate of @30%, Education Cess @2% and Secondary Higher Education Cess @1% is levied on LLP’s under Income Tax Act, 1961. Income Tax slab rate is not applicable in the computation of taxes. If the income of the partnership firm is more than Rs. 1 Crore in any financial year, Surcharge @ 10% would also be payable.
 

2. Remuneration and Interest

Remuneration and interest is allowed to be the partners. However, the tax deduction for remuneration and interest paid to the partners is allowed pursuant to the provision of section 40(b) of the Income Tax Act, 1961
 

3. NO Benefits of Presumptive Taxation

A Limited Liability Partnership cannot claim the benefits of Presumptive Taxation under section 44AD of the Income Tax Act, 1961. Although a partnership firm can avail this benefit.
 

4. Interest To Partners

If the LLP satisfy the requirements of section 184 of the Income Tax Act, 1961, interest paid to partners is deductible at the hands of LLP within limits prescribed under section 40(b). As per section 185 of Income Tax Act, if the requirements of section 184 are not satisfied, firm will be assessed as firm but shall not be eligible for deduction of remuneration or interest to partner. Interest paid/credited to partner will be allowable as deduction to LLP and it will be taxed at the hands of partner of LLP.
 
Interest should not pertain to period prior to partnership agreement and (c) Interest should not exceed 12%.
 

5. Signature and Verification on Income Tax Return

Income Tax return of LLP is signed by its designated partners. For any unavoidable circumstances, if designated partner is unable to sign and verify the return, or if there is no designated partner, any partner of LLP can sign and verify the income tax return.’'
 

6. Disallowance of interest u/s 40A(2)

As per section 40A(2) of Income Tax Act, any expenditure incurred by an assessee in respect of which payment has been made to specified persons (relative, director of company, partner  of firm, person having substantial interest in business of assessee etc.), is liable to be disallowed in computing business profit to the extent such expenditure is considered to be excessive or unreasonable, having regard to the fair market value of goods or services or facilities etc.

Thus, even if payment of remuneration or interest is allowable as per section 40(b) of Income Tax Act, it can be disallowed under section 40A (2) of Income Tax Act.

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