How are partnerships taxed?

A partnership firm and an LLP are taxed at a flat rate of 30 per cent (excluding applicable surcharge and cess (tax levied for a specific purpose)) on their income. Thereafter, the share of profit that a partner takes out from the partnership firm or an LLP is exempt in the hands of the partner (including the partners based overseas, subject to double taxation avoidance agreements).

The income (other than profits) earned by a partner is assessed and taxed as if the partner is self-employed and not an employee of an organisation.

Further, a partnership firm and an LLP are required to have a permanent account number in accordance with the provisions of the Income Tax Act 1961.

Reporting and transparency requirements

To what extent must partnerships, LLPs and similar structures file accounts and other documents and information with a government agency?

An LLP is required to file an annual statement of account and solvency with the Ministry of Corporate Affairs (MCA) within 30 days from the expiry of six months after the financial year to which the statement of accounts and solvency relate, and an annual return within 60 days from the end of its financial year. Further, an audit is required only after crossing a turnover of 4 million rupees or when aggregate capital contributions by the LLP partners exceeds 2.5 million rupees.

The statement of account and solvency and the annual return of an LLP can be viewed by carrying out a public search on the website of MCA; however, the partnership agreements filed by an LLP are not available on the MCA website for public review.

The Income Tax Act 1961 provides that partnership firms and LLPs involved in a profession with gross receipts of more than 5 million rupees and those involved in doing business and having sales turnover exceeding 10 million rupees are required to have a tax audit.

The details of the partners of a registered partnership firm and an LLP are available for the public to inspect.

Ownership and membership

Can anyone be a partner, and, if not, who can and cannot? Can bodies corporate or other partnerships own a partnership?

Any individual or body corporate can become a partner provided that the individual has:

  • not been found to be of unsound mind by a court of competent jurisdiction and the finding is in force;
  • not been declared an undischarged bankrupt; or
  • not applied to be adjudicated as an insolvent and his or her application is pending.

Further, a foreign entity can be a partner in an LLP and make an investment only in sectors where 100 per cent FDI is allowed in terms of the extant FDI policy.

Execution of documents

How do partnerships and LLPs execute documents? Must all partners sign? Can the partnership or LLP sign in its own name?

Partnership firms and LLPs typically execute the documents in their own name through the partners or nominees who have been authorised in this regard, as per the agreement between the partners. Any act done by a partner as per the authority granted to such persons binds the firm and its partners.