LLPs Lose Tax Advantage

New Delhi: Budget 2011 has introduced alternative minimum tax (AMT) on limited liability partnerships (LLPs) for sectors such as power and infrastructure.

An LLP, which combines the limited liability benefits of a firm with the flexibility of a partnership, is adopted as a tax-efficient vehicle for carrying on business as these do not attract taxes such as the minimum alternate tax (MAT) or the dividend distribution tax (DDT).

To streamline taxation of LLPs with other companies, the budget proposes to levy AMT of 18.5% on a partnership’s adjusted total income, which is the total income as increased by the tax deductions available for sectors such as power and infrastructure. AMT has been specifically introduced for LLPs.

While MAT is applicable for companies across business sectors, AMT is only for specific sectors.

India allowed LLPs from 2008. So far, 3,722 such firms have been formed.

“The ministry decided to levy AMT on LLPs as we don’t want to lose revenue on account of firms converting to LLPs to take benefits of tax exemptions,” revenue secretary Sunil Mitra said.

“Despite the amendment, LLPs should continue to be preferred in view of the absence of levy of DDT on distributions by LLPs to its partners,” said Prerna Mehndiratta, director, BMR Advisors?. “The introduction of AMT seems to put an end to the zero-tax regime for infrastructure projects and is likely to discourage use of LLPs for such projects.”

Pavan Vijay, managing director, Corporate Professionals, a Delhi-based consulting firm that advises companies on LLPs, said levying AMT would have a greater negative impact than what MAT could have caused. “To encourage LLPs a differential treatment has to be given,” he said.