CA Manoj Nahata 
Service Tax on legal services has always been a matter of debate amongst the professionals and the Government. Though the Govt. was tentative in imposing service tax on legal services long back but the strong representation from the legal fraternity put its efforts on the back foot. There was always a question that when the Chartered Accountants, Cost Accountants and Company Secretaries & other professionals were already under the tax net then why only the Advocates were spared. Finally, the Govt. took the call and Service tax on legal services was made applicable w.e.f.01.09.2009 vide Notification No. 26/2009-Service Tax dated 19.08.2009.
Initially, the service tax was levied only when legal services were provided by a business entity (advocate’s partnership firm/Company etc.) to another business entity (client’s partnership firm/Company etc.). But w.e.f.01.07.2012 this position is changed and now the advocates firm/Company are not required to charge the service tax rather business entity itself is made liable to pay service tax as receiver of service under the reverse charge mechanism. Thus w.e.f. 01.07.2012 the business houses needs to be very careful while making payment on account of legal services because the responsibilities for payment of 100% service tax is shifted on them as receiver of service under the reverse charge mechanism.
The levy of Service Tax on Legal Services was protested also and has undergone through the judicial intervention many times since its introduction. Recently, the Hon’ble Bombay High Court in order dated: 15.12.2014 in case of P.C. Joshi Vs. Union of India & others in WP No. 1927 of 2011 with other similar writ petitions rejected the advocate’s contention that advocates should be exempted from service tax because the tax is levied on “value addition which is made as a result of rendition of service” and “representation [of litigant clients] before a court does not result in any value addition” and the legal profession is not a business or a trade but a “solemn duty”. Further the Court did not accept the contention that the notification no. 25/2012 exempting legal services should be applied retrospectively. Hence the Writ was dismissed upholding the levy.
With the above background, let us first understand the taxability of legal services under the Service Tax law.
Position Prior to 01.07.2012
The legal services were liable to tax first time under section 66 read with section 65(105) (zzzzm) of the Finance Act, 1994. The definition and scope of service under section 65 (105) (zzzzm) was as under:
“Taxable Service” means any service provided or to be provided to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner.
Provided that any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.
Further the term ‘Business Entity’ was also defined under section 65(19b) of Finance Act, 1994 as amended:
“Business entity” includes an association of persons, body of individuals, company or firm but does not include an individual.
Thus on going through the above definition it can be said that it was not a tax on a profession of lawyer or advocate. Unlike chartered accountants, the persons was not subjected to tax merely he is holding educational qualification as advocate / lawyer and is practicing as member of the Bar Council. It was a tax on services rendered by any business entity in relation to advice, consultancy or technical assistance in any branch of law. Hence individual legal practitioners were out of tax net irrespective of the quantum of their professional fee or receipts. Thus it was only the Company, firms, association of persons or bodies of individuals rendering legal consultancy service were liable to service tax.
However the Small service providers were continued to be exempted under notification 06/2005 dated: 01.03.2005 for first aggregate realization (including other taxable Services) of Rs.10.00 Lakhs for financial year provided gross taxable services rendered in preceding financial year were below Rs.10.00 Lakhs.
Further the following legal services are not liable to service tax:
- Appearance before any court, tribunal or authority.
- Services provided to individuals by any business entity (firm, company,
association of persons or body of individuals).
It means except for services mentioned above, all services rendered by legal consultants to non-individuals were taxable.
The Finance Act, 2011 further expanded the scope of service tax on legal services so as to cover within its ambit even individual lawyers. However the coverage was not omnibus. The scope was expanded by including services provided by business entities to individual as well as representational and arbitration services by individuals to business entity. There was however no service tax on services provided by individuals to other individuals.
Position w.e.f. 01.07.2012
W.e.f.01.07.2012 there is a paradigm shift in the charge and levy of Service Tax. The Negative List based regime brought many changes. The legal service is now brought under the reverse charge. As per Notification No. 30/2012ST dated 20.06.2012, in case Legal services provided or agreed to be provided by advocates or firm of advocates to any business entity located in taxable territory then, 100% Service Tax needs to be paid by receiver of such service, i.e. Business Entity.
Exemption to Legal Services:
The Government vide entry serial no. 06(b) of the Mega Exemption notification no. 25/2012 dated: 20.06.2012 exempted the legal services by an individual advocate or a partnership firm of advocates from the whole of the service tax that can be levied thereon under section 66B the Act, when rendered to :
- an advocate or partnership firm of advocates providing legal services(i.e same class of persons);
- any person other than a business entity; or
- a business entity with a turnover up to Rs.10 Lakhs in the preceding financial year.
As per the new law introduced from 01.07.2012, legal services provided by an individual as an advocate or a partnership firm of advocates to any person other than a business entity is exempt. Hence, services of advocates used for the purpose other than business are out of Service Tax net. For example an advocate providing legal services to a Charitable Trust is not liable to pay service tax. Further, benefit of exemption is also extended to small business entities whose turnover is less than rupees ten lakhs in the preceding financial year. Here, the term turnover should be understood as to include not only taxable services but some total of all economic activities including goods and services. Apart from above, the legal services provided by an individual as an advocate or a partnership firm of advocates to an advocate or partnership firm of advocates providing legal services has also been given exemption.
Thus, the individual advocates or a partnership firm of advocates providing legal service are not liable to pay service tax under any circumstance and in case of service provided to the business entities having turnover above Rs.10 Lakhs in the preceding financial year, such business entities are only liable to pay tax under reverse charge. Thus, per se advocates are freed from hassle of Service Tax registration and payment etc. However, the scope of the exemption is limited to the legal services only and hence all other services provided by an advocate or firm of advocates, for e.g. renting of immovable property will be covered by the normal provisions of the Service Tax laws and hence advocates would be liable to pay Service Tax.
Also, service provided by an arbitral tribunal is also exempt under the entry sl. 6(a) of Mega exemption notification. An arbitral comprising more than one arbitrator will constitute an entity by itself. Thus, services of individual arbitrator when represented on such an arbitral tribunal will be exempted from imposition of service tax. Also exempted are services provided by an arbitral tribunal to:
- any person other than a business entity or
- a business entity with a turnover up to Rs.10 Lakhs in the preceding financial year
Cases where Legal Service is not exempted:
For legal services provided or agreed to be provided to business entities located outside India where place of provision of service is within the taxable territory, the advocate or firm of advocates is liable to pay tax. Such services include services relating to taxation advice, mergers and acquisitions, due diligence etc.
Also, in respect of services provided to business entities, with a turnover exceeding Rs.10 Lakhs in the preceding financial year, tax is required to be paid on reverse charge by the business entities.
Meaning of ‘Advocate’, Legal services & Business Entity:
It is necessary to understand the meaning of advocates, legal services and business entity to avail benefit of exemption notification.
As per clause (a) of subsection (1) of section 2 of the Advocates Act, 1961, “advocate” means an advocate entered in any roll under the provisions of Advocates Act, 1961.
The government has also defined the term legal service and as per the said definition “legal service” means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority. The scope of the term legal service is very vast as services provided in any branch of law falls under its umbrella.
As per Section 65B (17) of The Finance Act, 1994, “Business entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession.
Author’s Comments:
The legal Profession in India, inter-alia, is one of the respected professions. But there has always been a controversy about the levy of service tax on the legal services. When the Govt. finally took the bold step of introducing service tax on legal services it was challenged before different Courts in the Country. Further with the amendments made by the Finance Act, 2011, the matter was protested in larger way in different Courts including Hon’ble Gauhati High Court. In fact some of the Courts had though granted interim stay but final judgment is yet to be rendered. Recently, the Bombay High Court in disposing some of the writ petitions filed by legal practitioners & their body challenging the levy of service tax on advocates took the view that the levy was valid and within the judicial parameters.
In this regard, the author feels that the modus operandi prescribed for levy & collection in case of legal services appears to be discriminatory vis-à-vis other professionals where services rendered by individuals and services rendered to individuals are taxable in the hands of service providers professionals only. The advocates are rendering quite similar services as those rendered by other professionals except appearance in the Court of law. Take the example of Income Tax Practitioners, Sales Tax Practitioners, P.F. Consultants where all the professionals including advocates are engaged. But advocates are still given liberty to not to obtain registration, collect & pay service tax and file tax return. The author feels that such discrimination should be done away with the introduction of GST in the Country. *The author is a practicing chartered accountant at Guwahati and can be reached at: manoj_nahata2003@yahoo.co.in
