Taxation for Limited Liability Company

Last Updated at: Oct 23, 2019
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Taxation for Partnershoip or LLP

Apart from the conventional business entities operating in India, the new entrant in the field if a Limited Liability Partnership. With its entry and spread in the commercial sector of India, there arose questions as to the liability it would attract. The main contention surrounding the tax liability of a limited liability partnership was whether it would be taxed similar to a Private Limited Company or a partnership firm. Some clarity was brought in regarding the issue with the introduction of the Finance Act, 2009. It sought to amend the in operation Income Tax Act, 1961 and established that the tax liability of an LLP would be similar to Partnership Firms and different from the policy followed in a Private Limited Company

In case of taxation in a private limited company, the policy followed is that it is treated as a separate legal entity, distinct from its key functionaries. Moreover, in a private limited company, taxation is at the rate of 30%. In addition to the general levy of the income tax act, there are certain additional taxation charges that private limited company attracts. For instance:

  1. Education and Higher Education Cess: Apart from the 30% income tax, they are subjected to 2% of secondary education cess and 1% of higher education cess.
  2. Turnover exceeds 1 crore: For companies whose turnover exceeds the limits of Rs. 1 crore, a surcharge is also levied at 5%.
  3. If dividends have been declared: If the private limited company declares a dividend, then they are also subjected to dividend tax of 15%, separately charged with 2% and 1% education and secondary and higher education cess. For companies declaring a dividend, the surcharge is also 10% instead of 5%. The total dividend tax works out to 16.995% under Section 1150. Once the dividend tax is paid by the company, the dividend received by the shareholder of the company is exempt from Income Tax.

What taxation policy is followed in the case of a Limited Liability Partnership

Similar to a Partnership Firm, starting from the assessment year 1993-94, a partnership firm is treated as a separate taxable entity. That is the reason why it has to pay income tax at the rate of  30% plus 2% education cess plus 1% secondary and higher education cess. This policy is very much similar to that of a private limited company. However, the ascertainment of taxable income for an LLP follows a different policy. In an LLP, a partner’s remuneration can be deducted, if claimed therein.

Another deduction in the policy is that of the interest of capital provided by the partners to the LLP. In order to claim the above deductions, it is essential that the LLP Agreement effectuating the functioning of the organisation lays it down categorically. A clause in the agreement should allow for the payment of remuneration and interest on capital and loan provided by the partners to be deducted while ascertaining the taxable income. The remuneration is payable only to individual LLP Partner who are actively engaged in conducting the affairs of the business or profession of the LLP firm.

How can the remuneration of an LLP Partner be deducted? 

Firstly, the book of profit is deducted in two halves. One is up till the book of profit shows profit till Rs 3,00,00. Up to this amount either Rs.1,50,000 or at the rate of 90% of the book of profit (whichever is more) is the remuneration deductible.  On the balance of the book of profit, the rate at which the remuneration can be deducted is 60%

How is the income of an LLP Partner treated for taxability? 

Remuneration and Interest received by a partner from an LLP are generally taxed as Business Income of the LLP Partner. Therefore, if there are any expenses incurred by the LLP partner for business purpose (like for instance, interest payments and business loss of proprietary business) can be set off against receipt of interest and remuneration. There is no necessary provision of TDS deduction from the LLP while making payment of interest and remuneration paid to LLP Partners.

Is surcharge applicable to the income of an LLP?

In usual situations, a surcharge is not applicable to the total income of an LLP. However, starting from the financial year 2013-2014 and assessment year 2014-2015, a surcharge of 10% is applicable only if the income of the LLP or a partnership firm, as the case may exceed Rs. 1 crore.

Are LLPs required to file an Income Tax Return? 

Yes, all LLPs are mandated to file an Income Tax Return every financial year, on or before 30th September. The income tax return, as filed by an LLP is signed by the partner so designated. In case of his unavailability, the same can be signed by any of the other partners currently active in an LLP.

 

A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.