k. gopal rao & company for bangalore branch of sirc of icai · overview, mdf & taxation....
TRANSCRIPT
9/13/2010
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Limited Liability Partnerships
A presentation by
M/s. K. GOPAL RAO & Company, Chartered Accountants, Chennai
For Bangalore Branch of SIRC of ICAI
Limited Liability PartnershipOverview, MDF & Taxation
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Disclaimer
• These are my personal views and cannot be construed to be the
views of the SIRC or K. GOPAL RAO & Co., Chartered Accountants
• No representation or warranties are made by the SIRC with regard to
this presentation
• These views do not and shall not be considered as professional
advice
• This presentation should not be reproduced in part or in whole, in
any manner or form, without my or SIRC‟s written permission
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Agenda
1. Overview
2. Three phases of change
3. Corporate form vs. MDF through LLP
4. Capacity Building & Challenges
5. Tax aspects
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Agenda 1:
Overview of LLP
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Under the MCA umbrella – Allied legislations
i. The Chartered Accountants Act, 1949
ii. The Cost and Works Accountants Act, 1959
iii. The Company Secretaries Act, 1980
iv. The Partnership Act, 1932
v. The Societies Registration Act, 1860
vi. The Companies (Donations to National Funds) Act, 1951
vii. The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969
viii. The Competition Act, 2002 as amended by Competition (Amendment) Act,
2009
ix. The Limited Liability Partnership (LLP) Act, 2008.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
www.llp.gov.in
• A corporate business vehicle that enables professional
expertise and entrepreneurial initiative to combine and
operate in flexible, innovative and efficient manner, providing
benefits of limited liability while allowing its members the
flexibility for organizing their internal structure as a partnership.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Facts & Credits about Indian LLP
International practice - LLP is the standard for professional
practice.
Primary purpose is to convert Existing firms to LLP
Till 2009 there was lack of clarity on taxation aspects, that is
cleared now to certain extent.
More than 2100 LLPs are formed so far from 31st MAY 2009
MCAs observation - Eastern Region is lagging behind in
promoting LLP
ICAI‟s focus vs. MCAs focus (macro perspective)
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Debits of LLP
• Very high Penalty (almost 10 times compared with
Companies Act, 1956)
• Limited recognition by professional bodies (ICAI,
ICSI, ICWAI) so far in their statute as on date….
• Loss of secrecy of information (since available for
public)
• Limited public awareness
• Centralized at New Delhi
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Concept of LLP
• LLP contains elements of both ‘a corporate structure’ as well as ‘a
partnership firm structure’. LLP is called a hybrid between a company
and a partnership.
• The LLP can continue its existence irrespective of changes in partners. It is
capable of entering into contracts and holding property in its own name.
• The LLP is a separate legal entity, is liable to the full extent of its assets
but liability of the partners is limited to their agreed contribution in the
LLP.
• No restriction on number of partners. Just imagine a firm having 500 or
2000 partners
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
ORIGIN...Countries where LLP form is available
• The LLP structure is available in countries like UK, USA,
Gulf countries, Australia & Singapore.
• On the advice of experts who have studied LLP legislations
in various countries, the LLP Act is broadly based on UK
LLP Act 2000 and Singapore LLP Act 2005.
• Both these Acts allow creation of LLPs in a body corporate
form i.e. as a separate legal entity, separate from its
partners/members.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
LLP & “Traditional partnership firm”
• Under “traditional partnership firm”, every partner is liable, jointly
with all the other partners and also severally for all acts of the firm
done while he is a partner.
• Under LLP structure, liability of the partner is limited to his
agreed contribution. Further, no partner is liable on account of the
independent or un-authorized acts of other partners, thus allowing
individual partners shielded from joint liability created by
another partner‟s wrongful acts or misconduct.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
167C of Income Tax Act
• Section 167C has been introduced in the IT Act, which makes every
partner of a LLP jointly and severally liable for the taxes to be paid by
the LLP for the period during which he was a partner, unless the non-
recovery of taxes cannot be attributed to gross neglect, misfeasance
or breach of duty on his part. The aforesaid is irrespective of any
contrary provision in the LLP Act.
• Although this section appears to be in conflict with the scheme of the LLP
Act, which does not make the partners personally liable for the liabilities
of the firm, it seems to be in line with existing provisions of section 179 of
the IT Act, which cast a similar liability on the Directors of a private
company in liquidation.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Compulsory Insurance
• It must be pointed out that a very important aspect of LLP
laws across the world is the provision for compulsory
insurance.
• Compulsory Insurance is required to protect the interests of
persons claiming against the LLP and to ensure that they
receive what is due.
• Provisions for compulsory insurance can be found in most
LLP laws.
• The State of West Virginia in the US requires LLPs to carry
liability insurance of at least one million dollars.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Compulsory Insurance
• Liability insurance is generally designed to cover different kinds of
omissions, negligence, wrongful acts, malpractices and misconduct
for which liability is otherwise limited.
• Insurance companies in UK provide professional indemnity
insurance to cover all reasonable costs incurred in the defence or
settlement of claims arising from the above, as long as they are
accidental or unintentional acts.
• As a proverb states: “to get something, one must give something”.
• It is certainly rational that, to receive the benefit of limited liability,
firms must be asked to compulsorily insure themselves.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Is LLP applicable to specific professional
services regulated by law?
• LLP Vision: Framework should not be restricted to
professional services alone - recommended by
Naresh Chandra Committee.
• Accordingly, the LLP Act does not restrict the
benefit of LLP structure to certain classes of
professionals only.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Recommendations saw the daylight after 36 years
• Bhat Committee (1972);
• Naik Committee (1992);
• Expert Committee on Development of Small Sector Enterprises
headed by Sh. Abid Hussain in 1997 and
• Study Group on Development of Small Sector Enterprises (SSEs)
headed by Dr. S P Gupta (2001).
• Committee on Regulation of Private Companies and Partnerships
headed by Sh. Naresh Chandra (2003)
• The Committee on New Company Law (Dr. J.J. Irani Committee)
(2005)
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Likely users/beneficiaries of LLP
• Persons providing services of any kind
• Enterprises in new knowledge and technology based fields
where the corporate form is not suited.
• For professionals such as Chartered Accountants (CAs),
Cost and Works Accountants (CWAs), Company
Secretaries (CSs) and Advocates, etc.
• Venture capital funds where risk capital combines with
knowledge and expertise
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Likely users/beneficiaries of LLP…
• Professionals and enterprises engaged in any
scientific, technical or artistic discipline, for any
activity relating to research production, design and
provision of services.
• Small Sector Enterprises (including Micro, Small
and Medium Enterprises)
• Producer Companies in Handloom, Handicrafts
sector.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
LLP for Charitable or other
not for profit objectives
• No.
• The essential requirement for setting LLP is
„carrying on a lawful business with a view to
profit’.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Provisions of Indian Partnership Act, 1932
would be applicable to LLPs
• No, not applicable
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Why LLP? Instead of amending
Companies Act or Partnership Act
• Firms/enterprises engaged in biotech, information
technology, Intellectual property and other knowledge
based sectors find traditional partnerships unsuitable
because of full joint and several liability.
• The traditional partnerships are also considered
unsuitable for multi-disciplinary combinations
comprising a large number of partners, seeking a
flexible working environment but with limited liability.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
SIRC – ICAI – Members Statistics
Total number of members as on 6th August 2010 = 37,499
Members Male Female Total
Full Time COP 13,963 1,525 15,488
Part Time COP 1,688 283 1,971
Not Holding COP 15,996 4,044 20,040
Total 31,647 5,852 37,499
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
SIRC – ICAI – Firm’s Statistics
Firms Numbers
Proprietary Firms 4,565
Partnership Firms 2,766
2 Partners 1,629
3 Partners 541
4 Partners 243
5 Partners 106
6 Partners 69
7 Partners 49
8 Partners 39
9 Partners 32
10 Partners 25
> 10 Partners 33
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Agenda 2:
3 phases of change
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Three Phases of change in CA Act
• Before 2006 CA Act
• Post 2006 amendment i.e. 2006 to 2010
• Post 2010 proposed amendment pending as bill in
parliament.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Before 2006…
• Restrictions
• Compulsions
• Perimeter fenced
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
2006 amendment onwards…till date
• Relaxation
• Perimeter fenced but orbit enlarged
• 2006 amendment & council decision as on
01.10.2006
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Proposed amendment in 2010…
• No perimeter (but will it be fenced or gated…?)
• Professional opportunities for members multifarious…
• Networked professional firms will emerge…
• Small and medium practitioners will be challenged by
consolidating firms (proprietor firms and partnership
firms viz. 2 or 3 partners)
Agenda 3:
Multi Disciplinary Firms
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
MDF - Multidisciplinary Firms
• Ethical barrier imposed under the Chartered
Accountants Act, 1949 (till 2006)
• The scenario has changed, enabling the formation
of Multidisciplinary Firm (MDF), thanks to the
Chartered Accountants Amendment Act, 2006
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Ethical Barrier
• The First Schedule of the Chartered Accountants
Act, 1949, under
• Item (2)
• Item (3)
• Item (4) and
• Item (5)
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Ethical Barrier…removed but…questions left unanswered?
• Clause (2) of Part I considers that paying or allowing any share,
commission or brokerage in the fees or profits to any person
other than a member of the ICAI.
• Clause (3) treats accepting any part of the profits of the
professional work.
• Further, Clause (4) prohibits entering into partnership with any
person other than a Chartered Accountant in practice.
• Clause (5) considers as professional misconduct the securing of
any professional work through the services of a person not
qualified to be his partner.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
MDF
• The Chartered Accountants Amendment Act, 2006 has
modified the position to enable members of ICAI not only
to transact with a non-member, but also to enter into
partnership and share profits.
• It is clear that the objective, as far as MDF is concerned, is
to allow only members of such professional bodies
which have been constituted under a statute, to be eligible
to become partners.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Super SIX (council recommendation for MDF)
1) Company Secretary, member, ICSI, established under the Company
Secretaries Act, 1980;
2) Cost Accountant, member, ICWAI established under the Cost and
Works Accountants Act, 1959;
3) Advocate, member, Bar Council of India established under the
Advocates Act, 1961;
4) Engineer, member, The Institute of Engineers, or Engineering from a
university established by law or an institution recognised by law;
5) Architect, member, IIA established under the Architects Act, 1972; and
6) Actuary, member, IAI, established under the Actuaries Act, 2006.
How about Engineers and MBAs?
• In addition thereto, for the purposes of items (2), (3) and (5) of
Part I of the First Schedule to the Act, persons qualified in
India as:
• BE: Bachelor in Engineering from a university established by law or
an institution recognised by law;
• B.Tech: Bachelor in Technology from a university established by
law or an institution recognised by law; and
• MBA: Master in Business Administration from universities
established by law or technical institutions recognised by AICTE.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Amendment in CA Bill 2010
(ii) in sub-section (2),—
(a) after the words “chartered accountants in practice”, the words
“or in partnership with members of such other recognised
professions as may be prescribed” shall be inserted;
(b) in the Explanation, for the words “a firm of such chartered
accountants”, the words “a firm of such chartered accountants or firm
consisting of one or more chartered accountant and members of any
other professional body having prescribed qualifications” shall be
substituted.
MDF…
• It is clear that the objective, as far as MDF is concerned,
is to allow only members of such professional bodies
which have been constituted under a statute, to be
eligible to become partners.
• As and when the recommendation of the Council is
approved by the Government and notified, Chartered
Accountants will be in a position to enter into
partnerships with Company Secretaries, Cost
Accountants, Engineers, Architects, Advocates and
Actuaries. - Let’s Wait!
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MDF…
• Thus, the ethical barrier hitherto existing will get relaxed to
that extent.
• Similar relaxation may be granted later by amendment to
Regulations as and when the Council considers members of
some other discipline as eligible for admission into the MDF.
• Further, as and when ICAI enters into Mutual Recognition
Agreement (MRA) with any professional body or institution
situated outside India, by virtue of S. 29(2) of the Chartered
Accountants Act, 1949, members of ICAI will be in a position to
enter into partnership even with members of such
bodies/institutions {viz. MRA with CPA Australia}
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Chartered Accountants (Amendment) Bill, 2010
• In order to enable members to practice through a new business
vehicle i.e. LLP, consequential amendments in the Chartered
Accountants Act, 1949, arising out of the LLP Act, 2008
became necessary.
• Accordingly, the inputs of the Institute were called for and also
submitted to the Central Government in relation to the
amendments that were considered appropriate, followed by
oral discussions, specific to the consequential amendments,
arising out of LLP Act, 2008.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
CA (Amendment) Bill, 2010…PS Committee…
• The CG introduced in RS on 28th April, 2010 the
Chartered Accountants (Amendment) Bill, 2010, along
with two other Bills namely, the Cost and Works
Accountants (Amendment) Bill, 2010 and the
Company Secretaries (Amendment) Bill, 2010
pertaining to the sister Institutes.
• The RS, on consideration, referred the Bill to the
Parliamentary Standing Committee on Finance for
its examination.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
CA (Amendment) Bill, 2010…ICWAI to
ICMAI/ICAI…
• Note: The CWA (Amendment) Bill, 2010 contained a
proposal regarding change of its name from the Cost
and Works Accountants of India (ICWAI) to the Cost
and Management Accountants of India (ICMAI), which
in no way whatsoever relates to the amendments
necessitated by the LLP Act.
• Proposed: ICWAI to ICAI (Institute of Cost Accountants
of India)
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Before the PS Committee
• Our Institute was invited to make its submission before the
said Parliamentary Standing Committee on 7th July, 2010
and accordingly, suitable presentation/submissions were
made by our President along with the Vice President, and
the Chairman of the CL&CG Committee,
• While submitting our viewpoints on the proposed
amendments, arising out of the LLP Act, we have also
expressed our concerns over the proposal for change of
name of ICWAI to ICMAI. We are actively following up on
the matter.
Agenda 4:
Capacity Building and Challenges
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Terms of Reference of CCBCAF & SMP
• COMMITTEE FOR CAPACITY BUILDING OF CA
FIRMS AND SMALL & MEDIUM PRACTITIONERS
• To promote Corporate Form of Practice and Multi-
Disciplinary profession by way of encouraging
collaboration amongst the professionals/experts in the
relevant fields and facilitating multi-disciplinary
partnership and limited liability partnership.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Methods of Capacity Building
• To promote Corporate Form of Practice and
• To promote Multi-Disciplinary profession by way of
encouraging collaboration amongst the
professionals/experts in the relevant fields and
facilitating multi-disciplinary partnership and limited
liability partnership.
• To promote Merger
• To promote Networking
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Practice in corporate form
• Empowering the members to face the emerging challenges in
the service sector as well as to equip them for the opportunities
in the non-audit service area
• The Council decided to allow members in practice to hold the
office of MD, WTD or Manager of a company.
• Restriction: Engaged exclusively in rendering Management
Consultancy and Other Services permitted by the Council in
pursuant to Section 2(2)(iv) of the Chartered Accountants Act,
1949 and complies with the conditions(s).
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Practice in corporate form…management
consultancy
• The members can retain full time COP besides being the MD,
WTD or Manager of such Management Consultancy Company.
• There will be no restriction on the quantum of the equity
holding of the members, either individually and/or along with
the relatives, in such Company.
• Such members shall be regarded as being in full-time
practice and therefore can continue to do attest function either
in individual capacity or in Proprietorship/Partnership firm.
• They are also entitled to train articled assistants.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Name of MC Company
• The Management Consultancy Company shall have a distinct name which shall be
approved by the Institute – Application in Form „G‟.
• The name of Management Consultancy Company may indicate the area of
„Management Consultancy & Other Services‟ permitted by the Council from time to
time.
• Regulation 190 shall be applicable to the name of the Management Consultancy
Company.
• However, even if a name is provided and subsequently it is found that the same is
undesirable then, the said name can be withdrawn at any time by the Institute.
• The provisions in respect of name of companies as prescribed in the Companies Act,
1956 shall be applicable in letter and spirit.
• The MC Company shall neither be permitted to advertise nor to use logo.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Guidelines of ICAI
• Management Consultancy Company means a Company which
complies with the Guidelines for Practice in Corporate Form
issued by the Institute.
• Exception: The expression "Management Consultancy and
other Services" shall not include the function of statutory or
periodical audit, tax (both direct taxes and indirect taxes)
representation or advice concerning tax matters or acting as
liquidator, trustee, executor, administrator, arbitrator or
receiver, but shall include the following:
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Management Consultancy and Other Services
i. Financial management planning and financial policy
determination.
ii. Capital structure planning and advice regarding raising finance.
iii. Working capital management.
iv. Preparing project reports and feasibility studies.
v. Preparing cash budget, cash flow statements, profitability
statements, statements of sources and application of funds etc.
vi. Budgeting including capital budgets and revenue budgets.
vii. Inventory management, material handling and storage.
viii. Market research and demand studies.
ix. Price-fixation and other management decision making.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
• Management accounting systems, cost control and value analysis.
• Control methods and management information and reporting.
• Personnel recruitment and selection, Setting up executive incentive plans,
wage incentive plans, etc.
• Management and operational audits.
• Valuation of shares and business and advice regarding amalgamation,
merger and acquisition.
• Business Policy, corporate planning, organisation development, growth
and diversification.
• Organisation structure and behaviour, development of human resources
including design and conduct of training programmes, work study, job-
description, job evaluation and evaluation of work loads.
• Systems analysis and design, and computer related services including
selection of hardware and development of software in all areas of services
which can otherwise be rendered by a Chartered Accountant in practice
and also to carry out any other professional services relating to EDP.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Acting as advisor or consultant to an issue, including such matters as: —
• Drafting of prospectus and memorandum containing salient features of
prospectus. Drafting and filing of listing agreement and completing formalities
with Stock Exchanges, Registrar of Companies and SEBI.
• Preparation of publicity budget, advice regarding arrangements for selection of (i)
ad-media, (ii) centres for holding conferences of brokers, investors, etc., (iii)
bankers to issue, (iv) collection centres, (v) brokers to issue, (vi) underwriters and
the underwriting arrangement, distribution of publicity and issue material including
application form, prospectus and brochure and deciding on the quantum of issue
material (In doing so, the relevant provisions of the Code of Ethics must be kept
in mind).
• Advice regarding selection of various agencies connected with issue, namely
Registrars to Issue, printers and advertising agencies.
• Advice on the post issue activities, e.g., follow up steps which include listing of
instruments and despatch of certificates and refunds, with the various agencies
connected with the work.
Explanation: For removal of doubts, it is hereby clarified that the activities of
broking, underwriting and portfolio management are not permitted.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
• Investment counseling in respect of securities [as defined in the Securities
Contracts (Regulation) Act, 1956 and other financial instruments.] (In doing
so, the relevant provisions of the Code of Ethics must be kept in mind).
• Acting as registrar to an issue and for transfer of shares/other securities. (In
doing so, the relevant provisions of the Code of Ethics must be kept in mind).
• Quality Audit.
• Environment Audit.
• Energy Audit.
• Acting as Recovery Consultant in the Banking Sector.
• Insurance Financial Advisory Services under the Insurance Regulatory &
Development Authority Act, 1999, including Insurance Brokerage.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Firms…LLP…Corporate….?
• Proprietorship Firms or Individuals
• Partnership Firms
• LLP (only Chartered Accountants as partners holding COP)
• Company (only Chartered Accountants as directors holding
COP)
• LLP (CAs + Members of recognised professional bodies)…?
• Corporate (CAs + Members of recognised professional bodies)…?
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
MDF…
• On the other hand, if a partnership firm was constituted to be the
SPV, a Chartered Accountant could not be a partner with non-
members and he had to secure the services of non-members only
as employees or retainers even in that firm.
• An MDF is intended to provide a better mechanism to get over
these practical difficulties, so that a Chartered Accountant in
practice can enter into partnership with professionals in other
disciplines.
• Thus, the choice emerges between corporate practice or an MDF
in consultancy management services. Simplicity in terms of
procedural requirements may attract small and medium
practitioners (SMPs) to opt for MDF than for a corporate status.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
MDF…
• Again, the volume of funds required and methodology preferred
for pooling of monetary resources may be deciding factors to
choose between a corporate entity and an MDF.
• Yet another crucial factor to be borne in mind is that an MDF
can engage itself in both core and non-core areas, whereas in
corporate form, exclusive areas like statutory auditing
cannot be undertaken. S. 25 of the Chartered Accountants Act,
1949, makes it clear that no company shall practise as Chartered
Accountants.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Amendment of section 25 vide CA Amendment Bill, 2010
3. In section 25 of the principal Act, in sub-section (1), the
following Explanation shall be inserted, namely:—
'Explanation.—For the removal of doubts, it is hereby declared
that the "company" shall include any limited liability partnership
which has company as its partner for the purposes of this
section.'.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Challenges…
• For instance, the minimum number of CA’s as partners .
• For instance, name and description of the firm could be an
issue.
• Attestation of different work (Company Audit / Cost Audit /
Secretarial Audit)…? Can an LLP do all this under one
roof?
• If at all disciplinary action should be taken then against
which member and by which Institute (ICAI / ICWAI / ICSI)
such action will be taken.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Challenges
• MDF as a concept can pose many issues and
challenges in the course of implementation, which need
to be carefully addressed and solutions to be spelt out.
• Norms and principles are expected to be laid down in
due course by the Council of the ICAI for clarity in
operation of MDF and for resolving conflicts that may
arise in practical situations.
• Let‟s wait and watch…
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Agenda 5:
Taxation
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Unique features
• Income Tax Rates – 30% + 3% (even for Non-Resident
LLPs)
• PAN – 4th Character will be „F‟
• Wealth Tax Applicability - ? (should it be treated as
company for wealth tax liability) – Issue unresolved
• No Corporate Dividend Tax – No CDT
• No Minimum Alternate Tax – No MAT
• 2(22)(e) – Not applicable
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Remuneration, Interest and Profit Sharing
• LLP enjoys both the advantages of a private limited company
and also a partnership.
• Similarly, as compared to partnership, for LLP conditions for
claiming deduction of remuneration paid to partners of LLP
would be as per section 40(b).
• Interest and profit sharing ratio should be defined in the
agreement evidencing the LLP in order to claim deduction
from the profits of LLP.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Recent Amendments in Finance Bill, 2010
• Finance Act, 2009, introduced several provisions in the Act
to treat LLP as a partnership firm for the tax purposes in all
respects.
• The Finance Bill, 2010, takes the process of amendment
further, primarily for small companies having turnover of
Rs. 60.00 lacs or less, by amending sections 32, 35DDA,
43, 47, 47A, 49, 72A and section 115JAA, primarily aimed
at providing tax neutrality for conversion of the private
limited companies and unlisted public companies into LLP.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Section 47 (xiiib)
• By introducing clause (xiiib) in section 47, it is proposed that the
transfer of assets on conversion of a company (private or
unlisted public company) into a LLP in accordance with section
56 and 57 of the LLP Act, 2008 shall not be considered as
transfer for capital gains purposes u/s. 45 of the Act.
• No capital gain therefore would accrue to the company upon
transfer of assets from company to the LLP, despite the fact that
the assets of the company would become the assets of the LLP
by virtue of section 58 (4)(b) of the LLP Act, 2008.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Tax Neutrality
i. all the assets and liabilities of the company immediately before the
conversion become the assets and liabilities of the LLP;
ii. all the shareholders of the company immediately before the conversion
become the partners of the LLP and their capital contribution and
profit sharing ratio in the LLP are in the same proportion as their
shareholding in the company on the date of conversion;
iii. the shareholders of the company do not receive any consideration or
benefit, directly or indirectly, in any form or manner, other than by way
of share in profit and capital contribution in the LLP;
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Tax Neutrality
iv. the aggregate of the profit sharing ratio of the shareholders of the
company in the LLP shall not be less than 50% at any time
during the period of five years from the date of conversion;
v. the total sales, turnover or gross receipts in business of the
company in any of the three previous years preceding the
previous year in which the conversion takes place does not
exceed sixty lakh rupees; and
vi. no amount is paid, either directly or indirectly, to any partner out
of balance of accumulated profit standing in the accounts of the
company on the date of conversion for a period of three years
from the date of conversion.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Cumulative conditions
• The conditions mentioned above are cumulative
and each condition is required to be satisfied.
• Non-fulfilment of any one condition would render
the transaction as transfer of assets and taxable
as profits and gains of the successor LLP
chargeable to tax in the previous year in which the
requirements are not complied with.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
47A(4)
• If the conditions stipulated are not complied with,
the capital gains not charged to tax in the hands
of the company shall be deemed to be the
profits and gains of the successor LLP
chargeable to tax by virtue of newly inserted sub
section 4 in Section 47A, for the previous year in
which the requirements are not complied with.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
COA & WDV
• The cost of acquisition of various assets acquired
by the LLP upon conversion will be the cost of
acquisition of these assets in the hands of the
company prior to conversion and the written down
value of the block of asset shall be the written
down value of the block of asset for the company
as on the date of conversion.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
COA (LLP) = WDV (Company)
• The actual cost of the block of assets in the case of the
successor LLP shall be the written down value of the block
of assets as in the case of the predecessor company on the
date of conversion.
• Amendments is also made in section 49(1) to provide that
the cost of acquisition of the capital asset for the successor
LLP shall be deemed to be the cost for which the
predecessor company acquired it.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Section 32
• It is also proposed that the aggregate
depreciation allowable to the predecessor
company and successor LLP shall not exceed, in
any previous year, the depreciation calculated at
the prescribed rates as if the conversion had not
taken place.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
72A(6A)…behold let’s use it positively
• Section 72A, is proposed to be amended to allow carry
forward and set off of accumulated loss and unabsorbed
depreciation allowance in the hands of the company upon
conversion.
• Such accumulated loss and unabsorbed depreciation will
be treated as the loss and depreciation of the year in
which such conversion takes place and accordingly,
fresh period of 8 years will be available for set off of loss
in the hands of LLP upon conversion.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Non-eligibility for MAT Credit in case of
conversion from Company to LLP
• Under the Finance Bill, 2010, extensive provisions
are made for providing tax neutrality to conversion
of a private limited company or unlisted public
company to Limited Liability Partnership (LLP).
• However, the provisions of section 115JAA
granting credit for MAT paid shall not apply upon
conversion into LLP.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Non-eligibility for MAT Credit in case of
conversion from Company to LLP
• Credit in respect of tax paid by a company under section
115JB is allowed only to such company under section
115JAA.
• It is proposed to clarify that the tax credit under section
115JAA shall not be allowed to the successor LLP.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Non-eligibility for MAT Credit in case of
conversion from Company to LLP
• Credit in respect of tax paid by a company under section
115JB is allowed only to such company under section
115JAA.
• It is proposed to clarify that the tax credit under section
115JAA shall not be allowed to the successor LLP.
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Agenda 4:
Post Budget Memorandum
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Clause 18 – Insertion of clause (xiiib)
in section 47
• It may be noted that the exclusion applies only to the
company and not to the shareholders.
• Under section 55 read with Schedules 3 and 4 of the
Limited Liability Partnership Act, the company will be
deemed to have been liquidated on its conversion into an
LLP.
• Consequently, the provisions of section 46(2) and
section 2(22)(c) levying tax on the shareholder on
distribution of assets on liquidation of the company
would become applicable.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Clause 18 – Insertion of clause (xiiib)
in section 47
• In order to provide exemption in the hands of
shareholders on conversion of a company into a
LLP, the words “Notwithstanding anything
contained in section 46(2)” may be added at the
beginning of clause (xiiib) of section 47.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Benefit to be extended
• The benefit of exemption/deduction available to the
predecessor-company under sections 10A, 10AA,
10B, 10C, 35A, 35AB, 35D, 35DD, 80-IA, 80-IB, 80-
IC, 80- ID, 80-IE etc. may be allowed to successor-
LLP, on such conversion, for the unexpired period.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Equity Shareholders only
• Clause (b) of the proviso to section 47(xiiib) may be
amended to substitute “equity shareholders” in the
place of “shareholders”.
• Excluding preference shareholders
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Disqualified partners for exclusion
• In clause (d) of the proviso to section 47(xiiib), it
may be provided that shortfall from the prescribed
percentage of 50%, resulting consequent to death
or disqualification of a partner, may be permitted.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Increase sought for 60 lakhs limit
• The limit under clause (e) of the proviso to section
47(xiiib) should be suitably enhanced so that more
closely held family companies are encouraged to
avail the benefit of conversion to LLP.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Inclusion of conversion of Firm into LLP
• The conversion of a firm into a LLP should be
included in the list of transactions not considered
as a transfer under section 47.
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Agenda 6:
Disclosure, Audit and Filing Requirements
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Maintenance and Filing of Accounts
• An LLP shall be under obligation to maintain annual
accounts reflecting true and fair view of its state of
affairs.
• A “Statement of Accounts and Solvency” in
prescribed form shall be filed by every LLP with the
Registrar every year.
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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Audit Mandatory like companies?
• The accounts of every LLP shall be audited in accordance
with Rule 24 of LLP, Rules 2009.
• No Audit - whose turnover does not exceed, in any financial
year, 40 lakh rupees, or whose contribution does not exceed
25 lakh rupees, is not required to get its accounts audited.
• However, if the partners of such limited liability partnership
decide to get the accounts of such LLP audited, the accounts
shall be audited only in accordance with such rule.
K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU
Annual Return
• Every LLP would be required to file annual return in
Form 11 with ROC within 60 days of closer of financial
year.
• The annual return will be available for public inspection
on payment of prescribed fees to Registrar.