Monday, May 5, 2008

Revised Limited Liability Partnership Bill on the Horizon

A revised bill on Limited Liability Partnerships (LLPs) has been approved by the Union Cabinet, reports The Economic Times. The LLP Bill is set to be introduced in Parliament soon. The establishment of LLPs would enable professional services firms, such as those constituted by chartered accountants and lawyers, to carry on their activities without risk of personal liability of partners (beyond their share of capital in the firm). This would bring the Indian legal position on par with other developed jurisdictions where LLPs have been permitted for professional services firms. The new Bill replaces the previous Bill of 2006 as it takes into account suggestions given by the Standing Committee

As with many other laws and regulations that seek to establish new types of entities, the tax position regarding LLPs is yet unclear. However, it is expected that necessary changes will be brought about through amendments to the Income Tax Act to clarify the position regarding taxation of LLPs. A thornier issue relates to the payment of stamp duty when companies (mostly private limited) or other entities convert themselves into LLPs. When such conversion occurs, there is notionally a transfer of property of the erstwhile company or other entity to the LLP thereby resulting in a conveyance that is subject to stamp duty. Conversions to LLPs become prohibitively expensive if the stamp duty implications are severe. This scenario gets further complicated because stamp duty on conveyances fall within the state subject, and the Centre cannot legislate on the same. Hence, it becomes virtually impossible to convince all relevant states to impose less rates of stamp duty on conveyances arising out of conversion to LLPs or even to seek an exemption for such transaction. That could impose a hindrance on cost-effective implementation of conversions to LLPs.

These and other implications can be reviewed further once the Bill is introduced in Parliament and its detailed provisions are known.

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