Partnership Firms In Indian Tax System

CA Manish K Dhoot (CA, B. Com, NCFM, CPCM) (5015 Points)

10 August 2010

Partnership Firms In Indian Tax System

A partnership is a common vehicle in India for carrying on business activities (particularly trading) on a small or medium scale. A profession is generally carried on through a partnership. There is no restriction on a company's participation in a partnership, but this is rate in practice.

Under the general law a partnership is not a separate entity distinct from the partners, but for tax purposes a partnership is an entity.

Partnership firm arises from a contract between two or more persons who contribute some tangible and some intangible assets together with an objective of earning profit therefrom which will be shared between them in predefined portion. Therefore-

The firm should be evidenced by an instrument [Section 184(1i)]
The individual shares of the partners in the asset of the firm and the profits (or losses) should be specified in the instrument [Section 184(1ii)]
A certified copy of the instrument of partnership shall acompany the return of income of the previous year in respect of which assesment of the firm is first soute [Section 184(2)]
Whenever Changes takes place in the constitution of the firm due to death or resignation of the partner or in the profit sharing ratio of the existing partners, a certified copy of the revised instrument of partner shall be submittd along with return of income of the related year. Where a minor is admitted to the benifit of the firm and the shares of the partners are unequal, it is necessary to specify how the shares of loss of the minor will be borne by the major partner.

The provisions related to the taxation of partnership firms are included in Chapter XVI of the Income Tax Act, 1961.U/s 184(1) of the Act, with effect from April 1, 1993 a firm shall be assessed as a partnership firm (PFAS), if the given conditions are satisfied as follows:

Partnership is evidenced by a partnership deed and a certified copy thereof, which is duly signed by all partners, and is filed along with the Return of Income (ROI).
Individual shares (profit/loss) of all the partners are also specified in the instrument i.e. in the partnership deed
Whenever there is some change in the constitution of the firm, then the firm requires to furnish along with the ROI, the certified copy of the partnership deed that is duly signed by all the partners.
A change in constitution of the firm has been defined under section 187 of the Act which includes admission of new partner(s), retirement of existing partner(s) as well as any change in the profit/loss-sharing-ratio and excludes dissolution of the firm incase of death of any of its partners.

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Income Tax Rates for Partnership Firms

Assessment Year 2010-11

Flat rate of tax at 30% on the total income of the firm.
Surcharge: Nil
Education Cess: 2% of the amount of Income Tax
Secondary & Higher Education Cess: 1% on the amount of Income Tax

Assessment Year 2008-09 and 2009-10

Flat rate of tax at 30 % on total income of the firm
Surcharge: 10% of Income tax (after rebate u/s 88E, if any) if the net income exceeds Rs. 1 Crore. It is subject to marginal relief in cases where income is marginally exceeding Rs. 1 Crore.
Education Cess: 2% of the amount of Income Tax and the surcharge
Secondary & Higher Education Cess: 1% on the amount of Income Tax and the surcharge

Limited Liability Partnership (LLP) - Taxation and Remuneration to Partners

A new type of entity by the name of limited liability partnership (LLP) has come into existence by LLP Act, 2008. LLP is nothing but an alternate corporate business that offers twin benefits of a limited liability companies as well as the flexibility of partnership firms. With the introduction of the LLP Act, 2008 a taxing framework was the next essential step. The Finance Bill proposes to tax the LLP at entity level along the line of general partnership meaning that LLP shall be liable to pay tax at the entity level while the share of the profits received by the partners shall be tax exempt.

Amendments:

The Finance Bill proposes the following new provisions & amendments to existing provisions in relation to LLP:

By virtue of clause 3(c) of the Finance Bill & section 2(23) (i), the term "partner" will include a partner of a LLP & the term "partnership" extends to include LLP.

By virtue of clause 53 of the Finance Bill, new clause (cd) under section 140, the Return of Income [ROI] of the LLP will be signed and verified by the designated partner.

In case of absence of designated partner or if the designated partner cannot sign the Return of Income, then the same shall be signed by any other partner.

By Clause 58 of the Finance Bill, section 167C makes every partner of a LLP jointly liable for the taxes to be paid by the LLP for a period during which he was a partner, unless the non-recovery of taxes is not due to gross neglect, misfeasance or breach of duty on his part.

LLPs are excluded from the provisions of presumptive taxation contained in the section 44AD of the Act