Tax Liability on Partnership Firm or LLP
In India Partnership firm are common due their simplicity. Partnership firms are easy to organize. According to Indian legal framework they are not separate legal entity from the partners.
Limited Liability Partnership (LLP) is a new concept in the context of India. Earlier the there were concerns related to taxation of the LLP. In Finance Act 2009, all the confusion was removed and it was made clear the LLP will be taxed similarly to the partnership firm.
The Indian income tax act suggests the firm is separate entity. The tax charged from partnership firm is different from the tax charged to partners. Hence a partnership firm has a separate PAN.
Provision under Income Tax Act
Under the Income tax Act many provision are described related to taxation of LLP or partnership firm. According to Income Tax Act Partnership firm or LLP is not defined clearly.
However section 2(23) does provide some clarification on this:
‘Firm’ and ‘Partner’ under the Indian Partnership Act of 1932, should have meaning assigned to it. The partners should be in agreement. Partnership must include two or more persons. The Partnership should include Limited Liability partnership defined under Limited Liability Act, 2008.
The partner of a LLP should be defined under the Limited Liability Partnership Act, 2008.
LLP under income tax is assessed like partnership firm. SO the tax calculation for LLP and Partnership firm is similar.
Any form of loss or depreciation does not get distributed among partners. The liability is of the firm since it is a separate entity.
The firm cannot deduct TDS on the remuneration and interest received by the partners.
Income tax calculation: LLP and Partnership firm
The income tax department charge a flat 30% tax on the income of the firm or LLP. Additionally, 2% education cess and 1% higher education cess is also added and tax is calculated.
Surcharge of 10% will be applicable if the taxable income exceed 1 crore.
For Partnership firms or LLP no Minimum Alternate Tax (MAT) or any form of Dividend Distribution tax will be applicable.
Any form of Capital Gains arising from sale of asset by the LLP or partnership firm will be taxable under Section 112. In case the partnership firm or LLP sell shares or mutual funds held by them within a year. The firm will be taxed under Section 111A at 15% flat. If the holding period is more than 1 year then income tax will not be levied under the section 10(38).
The income tax act wants a firm to follow the following instructions in order to treat it like a partnership firm.
1. Written agreement for LLP or Firm.
2. Profit Sharing must be clearly defined in the agreement.
3. Certified copy of agreement along with the return of last year in which the firm or LLP was formed.
4. In case any changes are made in the profit sharing. A certified copy of the changed agreement should be attached with return of previous year.
The firm or LLP must follow the above points when calculating interest on income and remuneration of partners.
Remuneration to Partners:
Calculation of income tax on partnership firm or LLP is complicated. Also the calculation of salary, interest and remuneration of partners is also hard, since partners are owners. Income tax act has put restrictions on partners of the firm under section 40(b).
Hence partners are allowed to claim only 12% P.A of simple interest on the invested capital.
If the interest rate is higher than 12% P.A. then income tax will be charged on the owner.
· Sleeping partners are not entitled to a salary. Remuneration is calculated on booked profit of a firm.
· Section 28 to Section 44 D is used to compute book profit. For calculation of booked profit remuneration will not be deducted.
· The conditions of remuneration need to be mentioned in the partnership deed or remuneration cannot be paid to partners.
· Deduction from the Chapter VI-A will happen from Gross Total Income.
· If the partnership firm is not able to pay the taxes due, partners are directly responsible for the recovery of due taxes.
Income Tax of Partners:
· The profit received by the partners of the firm cannot be taxed, since the firm has already been taxed. The interest and remuneration is taxable when partners file for their individual returns.
· In case remuneration is higher than fixed under section 40(b) then remuneration exceeding the limit is taxed. Thus it is better than the firm does not offer higher remuneration so that taxes are not paid by the firm and the partner.
In the end it can be seen that the tax calculation on Limited Liability Partnership and Partnership firm is similar. The amendment made in Finance Act, 2009 has made LLP and Partnership taxation rules similar. This has made the taxation of LLP and Partnership easier and better.