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LLP tax position clear and welcomed

This year's Union Budget has paved the way for law firm partnerships to convert to limited liability partnerships (LLPs).

The Budget announced today that for tax purposes LLPs would be treated in the same way as existing partnerships via the income tax provisions of the Finance Bill.

Luthra & Luthra tax partner SR Patnaik said: "Because of the tax neutrality of this structure this would probably incentivise a lot of firms to convert into an LLP."

He explained: "We do not follow a tax transparent partnership structure – partnerships are taxable as a separate tax entity. LLPs are going to be treated in the same way and taxed as a separate taxable entity and any profit shall be tax free in the hands of the partners."

Khaitan & Co tax partner Sanjay Sanghvi said it was a positive move and added: "It comes with a rider, which says that when you convert a general partnership into LLP, the rights and obligations should be done on a pro rata basis. You convert as it is, in the same rights and ratios – it is a tax transparent conversion."

Luthra & Luthra tax partner Vikas Srivastava added: "I think it's a good decision – it will make it easier for law firms – and for everybody - to convert."

Legally India reported last week that Amarchand Mangaldas was hoping to convert to an LLP structure as soon as it was permitted to do so.

The LLP structure is hoped to enable law firms to more easily grow beyond the 20 partner limit currently imposed on partnerships, although final adoption of LLPs by law firms will need to be accepted by the Bar Council of India.

Today's Budget has also stung lawyers by making legal services taxable for the first time and introduced a more powerful advance rulings tribunal for taxes, which could be a welcome relief for foreign investors.

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