Silence on FDI in LLPs Worries Experts.

NEW DELHI: The 18.5% alternate minimum tax on limited liability partnerships announced in the Budget could queer the pitch for entrepreneurs with plans to reorganise their businesses into this format that combines features of companies and partnerships.

To compound their misery, the finance minister did not make the much-anticipated announcement allowing foreign direct investment in this form of business.

"A number of foreign investors have been waiting for the government to allow them invest in LLPs," said Hemal Zobalia, executive director at consulting firm KPMG.

At present, LLPs have many tax advantages over forms of businesses. For instance, LLPs are not subjected to minimum alternate tax (MAT), surcharge or dividend distribution tax.

The department of industrial policy and promotion (DIPP) had floated a discussion paper last September on FDI in LLPs, a hybrid business model that combines the limited liability benefits of a company with the flexibility of a partnership.

The government had notified a law in March 2009 to legitimise LLPs as business entities with distinct tax advantages. Since then only 3,940 firms have been registered as LLPs.

"The ministry decided to levy an alternative minimum tax on LLPs as it didn't want to lose revenues from firms converting to LLPs to benefit from tax exemptions," revenue secretary Sunil Mitra said on Monday.

Institute of Chartered Accountants of India president G Ramaswamy said the decision to levy tax on LLPs worked at cross purposes with the government's intention to encourage them.

While some of these firms are groups of professionals in the consulting space, some large infrastructure companies used the model to reduce tax outgo.

Some industry analysts expect the new tax to help LLPs emerge as a growth vehicle for professionals and infrastructure ventures, rather than being a tax-arbitrage tool.

" This is an equitable move," said Prashant Maharishi, partner at consultancy firm BDO India.

"Legislation should not put a tax assessee in a position of advantage on taxes, just because they carry out their business using a different form of organisation," he said.

"In infrastructure, LLPs shall still be a preferred form if it makes business sense to combine two or more partners' strengths," Mr Maharishi added. For the services sector, the LLP format could give firms a multi-disciplinary edge.

The ministry of corporate affairs has so far had little success in convincing other arms of the government such as regulators of highways, power and banking to recognise LLPs as an entity that could participate in project execution. Often, bids of LLPs are rejected simply because the laid down policies in these sectors don't acknowledge their existence.

Source : economictimes.indiatimes.com