A proposed overhaul in India’s income tax law will reportedly raise the tax liability significantly for limited liability partnerships (LLPs) serving as investment vehicles for promoters, family offices, and high-net-worth individuals (HNIs).
The new Income Tax Bill, states an Economic Times report, seeks to expand the scope of the Alternative Minimum Tax (AMT), raising the effective tax rate on capital gains from 12.5 percent to 18.5 percent.
It should be noted that LLPs, which have become a preferred structure over the past decade for holding company shares and investing in private equity or venture capital funds, currently enjoy a concessional tax rate on long-term capital gains.
Under the existing rules, stated the report, AMT is triggered only if an LLP claims specific tax deductions and its effective tax rate falls below 18.5 percent. Pure investment LLPs that do not claim such exemptions have, however, so far, remained outside the AMT’s purview.
The new draft law removes this distinction.
If enacted in its current form, all LLPs, regardless of whether they claim deductions, would be subject to AMT, raising their tax outgo on capital gains and other investment returns, it has been learnt from the report.
Tax experts, cited in the above report, have warned that the move could adversely impact startups, family offices, and non-corporate investment vehicles.
An Tax expert, points out that the select committee has recognised the potential unintended fallout of the proposed changes. “It’s important that the law is clarified to avoid unnecessary disputes and provide much-needed certainty to taxpayers,” he has been quoted in the report.
With the legislation still under review, stakeholders are anticipated to lobby to exclude pure investment LLPs from the expanded AMT net.
Source from: https://www.moneycontrol.com/news/business/centre-plans-18-5-tax-on-llp-investment-gains-report-13311032.html