Overview of Conversion Process and Tax Framework

Conversion from sole proprietorship to LLP enhances liability protection while retaining business continuity. Not direct “conversion” (single owner vs 2 partners min); involves forming LLP, transferring assets via contribution agreement.

Tax-neutral under Section 47(xiiib) if conditions met—no capital gains on asset transfer. Losses/depreciation carry-forward 8 years as LLP’s. No stamp duty on transfer deed (operation of law). 2026 stable; no amendments.

Requires new PAN/TAN; GST migration possible as “going concern.”

Capital Gains Tax Implications: Exemption u/s 47(xiiib)

Asset transfer (land, machinery, goodwill) from proprietor to LLP exempt if:

1. All Assets/Liabilities Transfer: Complete going concern handover.
2. Proprietor Becomes Partner: >90% profit share 5 years.
3. No Dissolution/Partner Change: 5 years post-conversion.
4. No Consideration: Only profit share, no cash/shares.

Non-Compliance: Deemed transfer at FMV; capital gains u/s 45 (LTCG 12.5%/20% indexed pre-Jul24).​

Example: Machinery book Rs 10L, FMV Rs 20L → Exempt. Goodwill (self-generated) not taxed.

Carry Forward of Losses and Depreciation

Proprietor’s accumulated losses/unabsorbed depreciation deemed LLP’s previous year losses—carry-forward 8 years (u/s 32/72). Book losses not capital gains exempt.​

Condition: Same business continued.

GST Implications: Seamless Transition

• New GSTIN: Fresh registration post-LLP formation (old proprietorship surrenders).
• ITC Transfer: Form GST ITC-02 (within 30 days notice); unutilized credit migrates if going concern.
• No Disruption: Supplies continue; update contracts.

Steps:

1. LLP incorporation.
2. Proprietorship GST cancellation (REG-16, post-dues).
3. LLP GST REG-01 + ITC-02 approval.​

PAN, TAN, and TDS Compliance Changes

• New PAN/TAN: LLP separate entity; apply post-incorporation.
• TDS Threshold: >INR 1Cr TO business/>50L profession (u/s 44AB audit trigger). Deduct TDS post-threshold (professional 10%, contractors 1-2%).​
• Continuity: Old PAN closes; no carry-over dues.

Income Tax Return and Assessment

• ITR Transition: Final proprietorship ITR (up FY-end); LLP ITR-5 first.
• Audit: LLP >40L TO/25L contribution.
• Presumptive: LLP ineligible (partners taxed individually).​

Corporate Tax and Other Benefits

• No DDT/MAT: LLP pass-through; partners taxed slabs (no 30% corporate).
• Partner Remuneration: Deductible u/s 40(b) (INR 3L/INR 20% profit).
• Interest on Capital: 12% max deductible.​

Comparison Table:

Step-by-Step Tax Compliance Roadmap

1. Pre-Conversion:
   • Reconcile accounts, clear dues.
   • Value assets (book value transfer).
2. LLP Formation:
   • FiLE FiLLiP-03 (name), RUN-LLP.
   • 2+ partners (1 resident).
3. Asset Transfer:
   • Contribution deed (no stamp).
   • Book entry LLP accounts.
4. Registrations:
   • PAN/TAN (30 days).
   • GST REG-01 + ITC-02.
5. Post-Conversion:
   • First ITR-5 by Jul 31.
   • Update banks/vendors.​

Potential Tax Risks and Mitigation

• Deemed Dividend: Cash withdrawal → Taxable.
• Partner Change <5Yrs: Gains revive u/s 47A.
• Partial Transfer: Taxed portion.
  Mitigate: Full transfer docs, 5-yr continuity.​

Recent Judicial and CBIC Clarifications (2025-26)

• ITAT: Strict 47(xiiib) conditions; partial non-compliance taxes gains.
• CBIC: GST ITC-02 approval within 30 days if docs complete.
  No 2026 amendments; stable regime.​

Practical Case Study

Delhi trader (TO Rs 2Cr): Converted Jan 2026—assets Rs 50L transferred tax-free. Losses Rs 10L carried 8 yrs. GST ITC Rs 2L migrated. Partners drew remuneration deductible. [Hypo based on norms; ]

Compliance Checklist

Advantages Beyond Tax

• Limited liability.
• Perpetual succession.
• Easier funding.

Planning Tips for 2026

Assess losses/assets pre-conversion. Tax Advisor coordination essential. Monitor thresholds.

Knowledge of Section 47 ensures smooth transition.

Contact ‎‎+919034263307.​

🌐 Visit: https://taxationlegaladvisor.in