How does the Taxation work under Limited Liability Partnership Structure in India?
A limited liability partnership is popularly and shortly known as LLP. It is a body corporate formed and incorporated beneath the limited liability partnership act, 2008.
Based on the agreed contribution in LLP, partners’ liability will be limited under such type of firm. Nonetheless, once the founders decide to opt for limited liability partnership registration India then they are creating a separate legal entity and it is liable to the full extent of its assets. Due to its uniqueness, such as the blending benefits of both the partnership firm and the company, it is the most preferred form of organization among entrepreneurs.
Here, this article will dig into taxation of LLP, which contains the applicability of provisions of AMT (alternate minimum taxation) and also interest and remuneration allowable under the income tax.
Similar treatment of firm and LLP under the income tax.
As per Section 2 (23) (i) of the income tax act, 1961, which explains the term ‘firm’, as the firm will have the same meaning as given in the Indian partnership act, 1932, and the term ‘firm’ will include the LLP as explained in the limited liability partnership act, 2008.
Equally, the definition of the term ‘partner’ as described in section 2 (23) (ii) and the definition of the word ‘partnership’ as given in section 2 (23) (iii) also includes LLP within its scope.
As per the following definitions, we can conclude that both the firm and the LLP are similar under the income tax.
LLP’s income tax rate as applicable for the AY (assessment year) 2020-2021. – the LLP will be liable to pay income tax @30% on its income. If total income goes beyond INR 1 crore, then LLP is also liable to pay a surcharge of @12% on its income tax.
Also, an education and health cess of 4% is payable on the income tax plus surcharge which the LLP need to file apart from filing the GST return online annually or monthly.
AMT (alternate minimum taxation). – at first, the concept of alternative minimum tax (MAT) was introduced only for the companies; nonetheless, gradually it was made applicable to all the other taxpayers as well in the form of alternate minimum taxation.
AMT provisions’ applicability to LLPs – vide finance act, 2011, the provisions of alternate minimum taxation were made applicable to the LLP. The provisions of AMT are useful only in some instances as given below;
– When LLP has claimed deduction beneath section 80H to 80RRB (except section 80P).
– When LLP has claimed deduction beneath section 35AD.
– When LLP has claimed deduction beneath section 10AA.
AMT’s rate: AMT @18.50% (cess and surcharge as applicable) of adjusted real income is leviable.
Adjusted total income calculation – ATM rates are applicable on ‘adjusted total income,’ and that’s why it is crucial to comprehend the calculation of ‘adjusted total income.’ As given below;
Tax liability’s computation. – if AMT provisions apply to LLP, in that scenario, the tax liability of the LLP would be calculated as given below;
It is crucial to remember that the LLP is needed to pay tax as per AMT only in the financial year, wherein the tax on normal income is lesser than AMT on adjusted total income.
Alternate minimum taxation credit.
If, in any given year, the LLP pays tax liability according to the AMT, then it has the right to claim AMT credit in the subsequent year.
AMT credit would be a surplus of tax paid according to AMT over the tax payable as per normal provisions. For example, AMT credit = tax paid as per AMT provisions – tax computed as per standard provisions.
Reporting desideratum. – if AMT provisions apply to LLP, LLP is needed to get a report in FORM 29C from the CA. That report certifies that the calculation of adjusted total income and the AMT is according to the given provisions.
LLP’s allowable maximum amount of interest and remuneration.
Provisions given in section 40B of the income tax act, 1961, define the maximum amount of remuneration and interest, which is allowable to deduce to the LLP firm.
Now, let’s understand the provisions concerned with remuneration as given below;
– Precondition for claiming deduction and calculation of the maximum allowable deduction
- Remuneration contains any amount paid in the form of a bonus, salary, commission, etc.
- Remuneration, which has been paid only to the partners, is permitted as a deduction.
- The LLP deed must authorize any payment of compensation to the working partners.
- Take a look at the below table to understand the maximum allowable deduction.
Now, let us comprehend the precondition for allowable interest and maximum allowable interest.
- The LLP deed should authorize the payment of interest by definition.
- 12% is the maximum allowable rate of interest.
- In case where the person is the partner of LLP on behalf or for the benefit of any person, then any interest paid to such individual or otherwise as a representative capacity will not be permitted as a deduction.