Ambani completed a series of transactions last week, transferring 34% of his 45% equity holding in Reliance to 27 LLPs and 34 investment companies.
Here is what’s behind the move:
In conventional partnership firms, partners have unlimited liability i.e. their personal assets can also be called in to service liabilities of the firm.
But the LLP Act 2008 was created to encourage small and medium entrepreneurs and professionals to form companies with limited liabilities. The idea was that if a firm goes bust, its partners will not be held personally liable.
Neither RIL nor Mr Ambani are disclosing the reason. But tax experts said it would make the shareholding more tax efficient.
LLPs do not attract dividend distribution tax (DDT) and MAT. Typically, DDT is pegged at 15%, which works out to be 16.6% including surcharge and education cess while MAT is pegged at 18% which becomes 19.9% if one adds surcharge and education cess to it.
Moreover, LLPs are liable to pay 30% tax on income (plus education cess 3%), 3% lower than what a regular firm forks out in India.
So, it is clear that the LLP structure will help reduce tax burden of RIL promoters. However, the quantum of tax saved cannot be calculated now as it is not clear how much equity is being transferred to the 27 LLPs. Last year, Mr Ambani’s shareholding in Reliance earned him 1,088 crore as dividend.
However, if the business action of an LLP is to invest/trade in financial market, it will attract RBI’s glare. Recently, RBI set the ball rolling to bring all investment companies under its purview.
Will other promoters follow Ambani?
Typically, Indian promoter families control companies through myriad investment companies. So, it makes sense for them to make the shareholding more “tax efficient” by replacing investment entities by LLPs
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