Pranab Mukherjee puts Mukesh Ambani, others on the MAT

In one fell swoop, the government has rid limited liability partnerships (LLPs) of their tax-friendly aspect, thereby putting a few Indian businessmen including Mukesh Ambani, promoter of Reliance Industries (RIL), India’s largest private sector firm, on the MAT (minimum alternate tax).

In his budget speech, finance minister Pranab Mukherjee explained the new measure — “to preserve the tax base vis-a-vis profit-linked deductions.”

Revenue secretary Sunil Mitra reaffirmed his boss’ views on Tuesday: “I am protecting my tax base as I am trying to remove any arbitrage between companies and LLPs.”

The amendment will take effect from April 1, 2012, thereby giving businessmen a leeway of one year.

Going by experts, New Delhi moved in to plug this loophole after promoters of the two family-run businesses (RIL and Piramal Healthcare) restructured their ownership in the company in favour of LLPs, thereby saving on both MAT and dividend distribution tax (DDT).

An RIL spokesperson did not respond to a DNA Money query on the issue.

A spokesperson of Piramal Healthcare also did not comment.

According to Girish Vanvari, executive director at KPMG, LLPs had two advantages until February 28: they were not liable to MAT and they did not have to pay DDT.

“Now, LLPs are liable to pay MAT, so you can say that one of the advantages has been taken away,” said Vanvari.

LLPs will pay MAT at 18.5%, but will be exempt from DDT of 17% on the dividend declared.

According to a document prepared by PwC post budget, the MAT provisions, currently applicable only to companies, have now been extended to LLPs in a modified form —- alternate minimum tax, or AMT.

“AMT will be applicable to LLPs at a rate of 18.5%. However, in the case of LLPs, AMT will apply to the adjusted total income (as per the income-tax provisions) rather than the adjusted book profits, as is the case for companies. AMT credit is available to an LLP for 10 years.”

“The economic rationale (to impose MAT) is clear —- the government does not want LLPs that have been used by some corporates to save on tax to have any arbitrage,” Mukesh Butani, a partner at law firm BMR Advisors, said, adding that “this arbitrage seems to have been partly taken away”

Butani said the imposition of MAT has put professional firms like his in an “awkward position” and calls the measure more as an “afterthought.” According to him, the government should have thought of the taxation when it brought the legislation in 2009.

RIL’s adept promoters created 29 LLPs in August that owned 32.75% of India’s largest private sector company in terms of value under imaginatively named firms such as Kamalakar, Chakresh, Chakradhar and others. The 29 firms collectively earned Rs750.77 crore as dividend income. When the new alternate minimum tax norm becomes effective, and in the scenario of RIL maintaining dividends at the same level, the tax outgo could be as much as Rs139 crore.

Later in that same month, Ajay Piramal-run Piramal Healthcare Ltd, too informed the Bombay Stock Exchange about the restructuring process, which saw the promoter groups transferring 51% stake into private companies, which were later converted into limited liability partnerships.

The restructuring was done primarily to save dividend distribution tax for the promoters, who were in for huge windfall after Piramal Healthcare sold its domestic formulations to US drugmaker Abbott Laboratories Inc. for $3.72 billion.

Many family-controlled companies and promoters of other firms hold stakes in the parent company through a clutch of private limited firms that are liable to pay taxes such as the dividend distribution tax and minimum alternate tax. New Delhi introduced the concept of Limited Liability Partnership in 2009 as it helped professionals and entrepreneurs to conduct business easily.

“(Under LLPs) You can form and dissolve a partnership in relatively quicker time and you can also do the documentation work more easily,” said Jayant Thakur, a chartered accountant at Mumbai-based Jayant M Thakur and Co.

Thakur said only a few companies until now had been able to use the benefits for taxation purpose although he does acknowledge that the tax savings are “considerable.