Budget 2017 has given companies an advantage over partnership and Limited Liability Partnership in terms of Income Tax. The maximum marginal tax rates including surcharge will be following

Nature of Entity

Total Income (₹)

Up to ₹50 Lakhs

Above ₹ 50 Lakhs to ₹ 1 Crore

Above ₹ 1 Croreto ₹ 10 Crore

Above ₹ 10 Crore

Partnership Firm and LLP

30.9%

30.9%

34.61%

34.61%

Domestic Companies with total receipts in FY 2015-16 not exceeding ₹ 50 Crore

25.75%

25.75%

27.55%

28.84%

New Domestic Companies

25.75%

25.75%

27.55%

28.84%

From the above table it is very clear that domestic companies have direct advantage from taxation point of view as compared with Limited Liability Partnership and Partnership Firm. If we go in details we found that there are several more advantages to form a Company from Taxation and other point views. Following are some of them:

1. Restriction on payment of Salary and Interest to Partner when compared to Company

In Partnership and LLP, Partners can draw salary, remuneration and interest from partnership firm as per defined in the deed. However Income Tax act does not allow full amount of partner's salary as expense. The formula is given in Income Tax under Section 40(b) which defines maximum amount which can be given to partners and claimed as expenses for partnership firm and LLP.

Following are the Limits

Particulars

Salary, Remuneration and Interest allowed to all partners

on the first ₹3,00,000 of the book-profit or in case of a loss

₹1,50,000 or at the rate of 90 per cent. of the book-profit, whichever is more

on the balance of the book-profit

At the rate of 60 per cent.


For Companies there are no Limit on payment of Salary and Remuneration to directors and Shareholders

So in case there is profit of ₹ 10 Lakhs and if it has to be distributed among 4 Partners or Director following is the scenario

Nature of Expenses to be claimed

Company

LLP

Partnership

Profit before Salary / Interest / Remuneration to Director or partner

₹ 10,00,000

₹ 10,00,000

₹ 10,00,000

Maximum Salary / Interest / Remuneration which can be claimed as expenses in case of LLP and Partnership

NA

₹ 6,90,000

₹ 6,90,000

Maximum Salary / Interest / Remuneration to Director of Company

₹ 10,00,000

NA

NA

Profit after payment of Salary / Interest / Remuneration

0

₹ 3,10,000

 ₹ 3,10,000

Taxes on above

0

₹ 93,000

₹ 93,000

As it can be seen in above example a Company get full benefit of salary paid to director whereas in case of LLP or Partnership Firm they have restriction as upper limit which they can claim as expenses.

2. Presumptive Scheme a drawback for Partnership Firm

The presumptive scheme was introduce so that small business can take advantage of non-maintenance of book of accounts and leads to ease of doing business. Amount presumed as Income is 8% of the turnover or gross receipts or higher amount shown by the assessee.

Points of comparison

Partnership Firm

Company

Amount presumed as Income (Presumptive Income)

8% of the turnover or gross receipts

Not applicable

What if Income is lower than the amount presumed

Books of accounts to be maintained and Tax Audit and report need to be submitted

Company is required to maintain books of accounts and under statutory audit. Tax Audit only in case Turnover is more than 1 Crore

Whether deduction of Interest and remuneration to partners admissible to firm

Deduction is not allowed from FY 2016-17

No such deduction on payments to Directors and Shareholders

3. Dividend Distribution Tax

Dividend distribution tax is the tax levied by the Indian Government on companies according to the dividend paid to a company's investors. At present the dividend distribution tax is 15%. However many closely held companies instead of declaring dividend they pay Salary and remuneration to directors to avoid paying DDT

4. Formation and other cost

The cost for formation of Company is bit higher than compared to partnership and LLP. However it is one time cost and can be adjusted against the tax benefit it receives over LLP and partnership

Particulars

Company

LLP

Partnership

Cost of Formation

₹20,000

₹15,000

₹10,000

Cost of Annual Compliance

₹15,000

₹10,000

₹5,000

5. Other benefits

  • Company has Limited Liability when compared to partnership Firm
  • Better Corporate Governance
  • Easy Succession Planning and expansion
  • Separate Legal Entity as compared to Partnership Firm

BIRDS EYE VIEW OF ENTIRE PRESENTATION

Budget Implications

Companies

Limited Liability Partnership LLP

Partnership

Income Tax Applicable

25.75%

30.90%

30.90%

Assume Net profit of 10 Lakhs. Tax before remuneration will be

2,57,500

 3,09,000

 3,09,000

Maximum remuneration can be paid to director or partner on Net profit of 10 Lakhs

Any Amount (Assume 10 Lakhs.)

6,90,000 as per Section 40(b)

 6,90,000 as per Section 40(b)

Amount of Income after remuneration

Zero

 3,10,000

 3,10,000

Taxes payable

Zero

 93,000

 93,000

So In case of Company annual tax can be saved up to  93000/- as against LLP and Partnership

Formation Cost

 20,000

 15,000

 10,000

Annual Compliance Cost

 15,000

 10,000

 5,000

For any query you can write to Chirag@cachauhan.in. Before making any decisions do consult your Professional / tax advisor.  Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability neither for the loss or damage of any kind arising out of information in this document nor for any action taken in reliance there on

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CA Chirag Chauhan

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Chartered Accountant, CA Chauhan



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    I hope by reading this article you got enlighten on ,How forming a Company instead of LLP or Partnership can save tax for you after Budget 2017 ?Why you should form Company Instead of Partnership or LLP after Budget 2017, further to mention before taken any financial decision based on this content it is prefered to take an expert opinion as matter can be subjective.