Such LLPs, which have emerged as a convenient investment vehicle over last decade, will have to shell out more tax on their profits from sale of securities if the new Bill is enacted in its present form. The tax rate on profits from sale of shares or other investments could rise from 12.5%—the existing tax applicable for long-term capital gains—to 18.5% for these investment entities.
This looming tax arises with the proposed law widening the scope of the alternative minimum tax (AMT) on LLPs. AMT is aimed at collecting taxes from non-corporate taxpayers like individuals, Hindu undivided families (HUFs), and LLPs who claim significant deductions to lower their tax outgo.
Under the present tax regulations, if specified deductions claimed by an LLP—say, offering 30% tax on regular income like interest and rent and 12.5% tax on capital gains—lower its effective tax below 18.5%, then some of the claims are readjusted to recover a basic tax of 18.5% on its earnings. However, an LLP which claims no such deductions and functions as a pure holding entity with long-term capital gains as its only source of earnings, is not affected by AMT even though it pays only 12.5% tax. Also, individuals and HUFs earning less than `20 lakh are spared from AMT.
Things could dramatically change in the coming days. An LLP, according to the new Bill, would be hit by AMT irrespective of whether it claims any deductions and how much it earns. Thus, many LLPs acting as pure investment outfits of the family or the promoter group and paying atax of 12.5% or maybe a little more, will have to shell out 18.5% of the money they make from sale of any investment. Sensing the impact it could have on influential groups, tax professionals are awaiting the final stand that lawmakers take and the extent to which the suggestions of a select committee are factored in before the Bill becomes an Act.
According to Bhavin Shah, partner, PwC India, “The select committee has acknowledged the potential unintended consequences that may arise if AMT is made applicable to non-corporate assessees who have not claimed specified exemptions. Suitable clarifications should be incorporated in this regard to provide certainty and reduce litigation on this unintended change in legal position especially for partnerships and LLPs.” Like LLPs, partnership firms would also be impacted by the proposed application of AMT.
But LLPs offer greater flexibility. Governed by the Limited Liability Partnership Act, 2008, LLPs let the partners run the business without risking their personal assets from the LLPs’ debts and obligations. “The imposition of AMT under the proposed I-T Bill 2025 on partnership firms and LLPs that haven’t claimed specific deductions will have a direct financial consequence in contrast with the present I-T Act, 1961. By increasing their tax liability by 6%, it could put these entities at a clear disadvantage. Such a move could undermine the attractiveness of firms and LLPs for startups and family offices in India, which may not align with the ongoing efforts to develop India as a prominent financial hub,” said Ashish Karundia, founder of the CA firm Ashish Karundia & Co.
LLPs were brought under the purview of the AMT in the Finance Act, 2011. Like minimum alternative tax (MAT)—which is applicable for corporates and was reintroduced in 1996—is calculated after certain additions and deductions to the regular taxable income. It is widely believed that once the implications of the new Bill sink in, the suggestion to bring all kinds of LLPs under the AMT net could trigger active lobbying by Corporate India as large shareholders and ultra-HNIs would try to resist the change.
Content Source: economictimes.indiatimes.com