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LLP: Not yet the choice of private businesses

February 23, 2012 11:30 IST

Vishal J Shah – Executive Director (Tax and Regulatory Services), PwC India

Almost 8,000 limited liability partnerships (LLPs) have been registered since the introduction of the model as an alternative business vehicle in April 2009.

These partnerships are engaged in a variety of businesses in the manufacturing and services sector. However, if the experience in the US/UK with similar vehicles (LLPs/LLCs) is anything to go by, there seems a long way before LLPs could become the default vehicle choice for private businesses, as in those countries. Here is the Budget wishlist to clear some impediments.

While the LLP law allows existing companies to convert into LLPs, not many businesses have opted for this. One of the key reasons is that the law restricts tax exemption on such conversions to businesses with a turnover less than Rs 60 lakh.

Since conversion is not a transfer, it should not attract tax, but the provision restricting the exemption raises doubt. The Budget can suitably clarify the position or remove the limit criterion.

On the tax front, one also expects the introduction of tax neutrality provisions for merger/re-organisation between two or more LLPs, on par with companies.

In line with global practices, the tax law can also provide an option for "pass-through" taxation for LLPs i.e. taxation in the hands of the members.

Given the inherent management flexibility and limited liability, LLPs are best suited to operate as Special Purpose Vehicles (SPVs), particularly in the infrastructure space.

However, certain sectoral regulations mandate SPVs to be companies -- the NHAI guidelines for road projects being example. These guidelines were framed before the LLP regime and hence need to be relooked at.

While this is the realm of the regulator concerned, the finance minister will do good to set the tone.

Practically, a major impediment LLPs face is arranging debt finance. Generally, banks/institutions prefer the company structure.

Also, while foreign equity investment into LLPs is permitted, LLPs are denied access to foreign debt (external commercial borrowing, or ECB). Now, an LLP is more corporate than a partnership.

Further, the existing ECB framework effectively regulates end use to ensure allocation to productive assets (manufacturing, infrastructure, etc). Hopefully, the Budget would eliminate the discrimination between LLPs and companies on the lending front.

Vishal J Shah