INDIA Tax Structure (Partnership & Joint Venture)

INDIA >> Tax Structure >> Partnerships and Joint Ventures

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Tax System	Tax Administration	Taxation of Corporation
Taxation of Foreign Operations	Taxation of Shareholders	Taxation of Foreign Corporations
Partnerships and Joint Ventures	Taxation of Individuals	Taxation of Trusts and Estates
Indirect Taxes	Tax Treaties

Investor considerations

A partnership is an entity for tax purposes.

Double taxation can be avoided where the partnership is evidenced by a deed specifying the individual shares of partners.

A joint venture is not well defined in the law.

Unless incorporated or established as a firm as evidenced by a deed, joint ventures maybe taxed like association of persons, sometimes at maximum marginal rates.

Partnerships

A partnership is a common vehicle in India for carrying on business activities (particularly trading) on a small or medium scale. A profession is generally carried on through a partnership. There is no restriction on a company's participation in a partnership, but this is rate in practice.

Entity or conduit

Under the general law a partnership is not a separate entity distinct from the partners, but for tax purposes a partnership is an entity. Double taxation is avoided in the manner described below.

Taxable income

In the case of a partnership evidenced by a deed in which the individual shares of the partners are specified, the taxable income of the partnership is computed in the same manner as that a company. Salary, bonuses, commissions, and other remuneration payable to working partners and interest payable to partners according to the partnership deed are deductible to the specified limits in computing the partnership's taxable income and included in the taxable income of the applicable partner.

The partnership pays tax on the balance profits at 40 percent (30 percent on long-term capital gains). (It is proposed to reduce the capital gains tax to 20 percent.) The balance profits are not taxed in the hands of the partners.

A partnership not evidenced by a deed in which the shares of the individual partners are specified is taxed like a joint

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Taxation of foreign partners

A foreign partner is taxed in the same manner as an Indian partner. Membership of a nonresident company in an Indian partnership, if permitted by the Reserve Bank of India, would create a permanent establishment.

The tax treaties generally do not specifically address partnerships. However, the permanent establishment and business profits articles are relevant to nonresident corporate partners, while the independent personal services articles are relevant to nonresident individual partners. The article on elimination of double taxation enables nonresident partners to claim relief for double taxation in their country of residence.

JOINT VENTURES

Entity or conduit

A joint venture is not well defied in Indian law. If it is established as a partnership evidenced by a deed specifying the shares of the partners or incorporated as a company whose shares are held by two or more parties, it is taxed in accordance with its legal form (i.e., as a partnership or a company). Otherwise, a joint venture may be treated as an association of persons for Indian tax purposes, subject, in some cases, to a higher tax rate as explained below.

If the shares of the venturers are determinate and known since the inception of the venture, the taxable income of the venture is subject to tax at the slab rates applicable to individuals, except in the following cases.

1. If the taxable income of any venturer (excluding that from the venture exceeds Rs 40,000, the taxable income of the venture is subject to tax a flat rate of 40 percent.
2. If any venturer is a company liable to tax at a rate higher than 40 percent, that portion of the venture's income equal to the share of the venturer company is subject to tax at the rate applicable to the venturer company, and the balance is subject to tax at 40 percent.

If the shares of the ventueres are indeterminate or unknown on the date of formation or any time thereafter, the taxable income of the venture is subject to tax at 40 percent unless any of the venturers is a company liable to tax at a rate higher than 40 percent, in which case the entire taxable income of the venture is subject to tax at the higher rate applicable to the venturer company.

Under certain circumstances, the venturer's pretax allocated share from the joint venture is aggregated with other income to determine the tax payable on the other income. This has the effect of pushing up the other income to higher tax brackets except in the case of companies, which are subject to a flat rate.

Taxable income

The taxable income of a venture is determined in the same manner as in a company. Interest and remuneration payable to the venturers are treated as profit participations and added back in arriving at the venture's taxable income.

Taxation of foreign venturer

A foreign venturer is taxed in the same manner as Indian venturer, subject to the higher tax rate in the case of a nonresident corporate venturer.

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