Finance Minister Pranab Mukherjee on Monday proposed to levy a 18.5 per cent minimum alternate tax on Limited Liability Partnerships, a move that experts believe may discourage players to adopt this new form of business.Companies pay MAT on the book profits that do not come under the tax net because of various exemptions and incentives. "Where the regular income is less than the alternate minimum tax payable for such year, the adjusted total income deemed to be the total income of such limited liability partnership and it shall be liable to pay income tax on such total income at the rate of eighteen and one-half per cent," said the memorandum to the Finance Bill 2010-11.
According to experts, the imposition of MAT would make the LLP unpopular, as this was a major exemption they had been enjoying.
"It (exemption from MAT) was a major tax holiday the LLPs were enjoying. It seems that the imposition of MAT will discourage more and more LLPs to be formed," said KPMG Executive
Director Girish Vanavari.
"It is a very significant announcement for those who were looking to adopt the LLP structure.
Though it brings more clarity on the tax structure of LLPs, the imposition of MAT
is not very encouraging," ICAI President G Ramaswamy added.
While LLPs widely enjoy the taxation structure of partnership firms, two major exemptions it enjoyed was from paying dividend distribution tax and MAT - both applicable on companies.
"It should not be much disturbing for new entrants as the one major tax exemption - DDT - still stays. For those already into the LLP structure, the situation may materially impact the economics. LLP still has a tax advantage over the company form of business," said PriceWaterhouseCoopers Executive Director (Infrastructure and Real Estate Tax) Jai Mawani.
LLP, which is a hybrid of companies and partnership firms, allows unlimited number of partners in an entity with their liability restricted to the extent of the stake held by them.
The business form came into existence from 2009.
The new business structure benefits professionals like chartered accountants and company secretaries the most, as they are able to provide all services at one-stop window.
According to official data, there are about 3,938 registered LLPs as on February 27, 2011.
