By Yogesh Shah and Aakash Trivedi
The Finance Minister presented the Union Budget 2019 on 5 of July 2019, wherein section 115QA has been amended to implement the provisions of buy back tax on listed companies effective from the date of presentation of the Budget itself.
Correspondingly, amendment has also been made in section 10(34A) of the Act so as to provide the exemption in the hands of shareholders from capital gains tax. Thus, from 5 July 2019 even listed companies opting an option of buy back will require to pay tax in India while shareholders will enjoy the exemption from capital gains tax.
Introduction of the proposed amendment in section 115QA has effectively plugged the tax loopholes earlier available for repatriation in case of multinational companies (MNCs). Moreover, after the proposed amendment, taxes are to be paid at the level of company and not at the level of shareholder. Hence, the same shall pose the serious question with respect to the availability of credit in foreign country and consequently the same may result in double taxation.
In the light of the present legislation if we compare the company structure with the limited liability partnership (LLP), in the case of a company, though earnings are taxed at the rate of 25 percent or 30 percent based on the turnover criteria, on distribution of such profit, the company shall require to pay dividend distribution tax (DDT) at the effective rate of 20.56 percent and the same will result into effective tax payment of 45 to 50 percent on the profit earned.
Additionally, section 115BBDA taxes receipt of dividend in the hands of individuals too at the rate of 10 percent plus surcharge and cess as applicable, if dividend income exceeds limit of Rs. 10 lakh. Further, claim of credit in foreign country for DDT paid in India is subject to uncertainty.
On the other hand, in the case of an LLP, apart from ease of doing business and lesser compliance burden, distribution of profit earned shall be exempt in the hands of shareholders under section 10(2A) of the Act and no additional tax is levied on distribution. Also, section 94B will not be applicable in case of LLP. Further, under the Foreign Exchange Management Act, repatriation of the profit distributed shall be considered as current account transaction and it would be freely repatriable. Moreover, provision with respect to deemed divided is also not applicable in case of partnership firms.
Accordingly, MNCs can look at the option of establishing/converting LLPs in India instead of a company.
Looking at the present tax regime, we can certainly say that the lucrative nature of an LLP is increasing for foreign as well as domestic players, more so because of tax rates and easy repatriation options. If we compare a normal partnership with an LLP, though effective tax rates in both cases are similar, the liability of the individuals/partners is limited in case of LLP only.
Considering all above factors, it can be said that an investor may plan to establish LLP as against a company, which could be equally true for proprietors wherein rate of surcharge has been increased to 20 percent in case when income exceeds Rs 2 crores but does not exceed Rs 5 cores and 37 percent when income exceeds Rs 5 cores, which results into effective tax rates of 37.44 percent and 42.74 percent respectively.
Yogesh Shah is Partner and Aakash Trivedi is Assistant Manager with Deloitte Haskins & Sells LLP. Views are personal
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