LEVY OF SERVICE TAX ON REPRESENTATIONAL SERVICES PROVIDED BY

[Sumit Batra]

The Finance Bill, 2011 proposes to extend the ambit of Service Tax by expanding the scope of Service Tax on Legal Consultancy Service. As we are aware, Service Tax was levied on Legal Consultancy Service w.e.f. 1-9-2009.

The Finance Bill, 2011 has further expanded the ambit/scope of Legal Consultancy Service and brought in its ambit every person, who is providing representational services before any Court, Tribunal or Authority, the rider attached to this is that “such service is provided to the Business Entity”. It is of utmost relevance to mention here that, a service provided by an individual to the other individual has been kept outside the ambit of Service Tax. Thus, if a lawyer is rendering representational services to Mr. ABC then he is not covered in the new proposed definition but if an individual lawyer is rendering representational services to XYZ Pvt. Ltd then such an individual is covered under the definition. It may be noted that prior to these proposed changes, individuals were kept out of the purview of Service Tax and Service Tax was being levied only on business entities (law firms) and that too on all the services being provided by such business entities except for representational services.

Services NOT covered in the expanded ambit:

If any individual provides service to any business entity/ Individual in relation to advice, consultancy, legal assistance in any branch of the law in any manner, then such services are not subject to this levy.

When will the changes come into effect:

The proposed changes shall come into force only from the date which will be notified after the enactment of the Finance Bill, 2011 i.e. upon receiving assent from the President of India.

When does the Liability to pay Service Tax arise:

The Service Provider is entitled to avail exemption from the payment of Service Tax on taxable services provided by him upto a certain prescribed limit. This prescribed limit or in other words Threshold Limit is enhanced from time to time. At present, the Threshold Limit is Rs. 10 Lakhs (by virtue of Notification No. 8/2008 - ST). This would mean that any person who is providing a taxable service (a lawyer/advocate providing representational services to a business entity) is not liable to pay Service Tax till his receipts exceed the threshold limit of Rs. 10 Lakhs. Thus, liability to pay Service Tax would arise from the first Rupee earned over and above this threshold limit of Rs. 10,00,000/- on account of providing Taxable Output Service.

Below is an Illusturation to understand the concept.

A,B,C are three lawyers providing a host of services. Column 1,2,3 respectively show the amounts received by them from different services rendered by them.  Out of Column 1,2,3, only Column 2 (as per the Finance Bill, 2011) is subject to levy of Service Tax. It is assumed that these amounts in Column 1,2,3 pertain to the earnings in the financial year 2011-12.

Therefore, a lawyer would be liable to discharge the Service Tax liability the moment his earnings in Column 2 exceed the threshold limit of Rs. 10,00,000/-. 

	Representational Services to individuals  (1)	Representational Services to Business Entity (2)	Consultancy Services (3)	Amount Liable to Service Tax	Service Tax Liability
Mr. A	Rs. 5,00,000/-	Rs. 2,00,000/-	Rs. 1,00,000/-	Nil	Nil
Mr. B	Rs. 10,00,000/-	Rs. 7,00,000/-	Rs. 3,00,000/-	Nil	Nil
Mr. C	Rs. 8,00,000/-	Rs. 15,00,000/-	Rs. 4,00,000/-	Rs. 5,00,000	5,00,000 * 10.30%

In  the  above  example,  Mr.  C  is  rendering  Services  worth  Rs.       15,00,000/-  towards representation services being rendered to a business entity in the financial year 2011-12. Since 2011-12 would be the first year when these services were brought into the ambit of Service Tax, therefore, out of Rs. 15,00,000/- Mr. C would be entitled to avail exemption of a sum of Rs. 10,00,000/- for the purpose of payment of Service Tax and his liability will arise only from the first Rupee earned after this Threshold Limit i.e. from Rs. 10,00,001/-. For this very reason, Mr. C would be liable to pay Service Tax only on a sum of Rs. 5,00,000/- since this is what he has earned on account of providing a TAXABLE OUTPUT Service. The Column 1 & 3 would not be taken into consideration because they are NON TAXABLE OUTPUT Services and hence, not liable to levy of Service Tax. The amounts as mentioned in colum 1 & 3 would not even be considered for computing the aggregate value for the purpose of levy of Service Tax.

Registration - When Necessary?

As per Section 69 of the Finance Act, 1994, every person liable to pay Service Tax must mandatorily make an application for Registration to the designated officer. Thus, it is mandatory for a person to obtain registration under Service Tax the moment his aggregate value of TAXABLE OUTPUT Service exceeds Rs. 9 lakhs (as per Section 69(2) and the conditions laid therein) although the liability to pay Service Tax would arise only when the aggregate value of taxable output services exceeds Rs. 10,00,000/-.

Input Credit Availability:

A Provider of Taxable Output Service is eligible to take Input Credit (CENVAT Credit) of amount of Service Tax/ Excise Duty paid for availing input services. This means if a lawyer/advocate is using services such as Courier Service, Cleaning Service, Rent a cab service, Security Agency, Telecommunication Service, Travel Agency Services to provide TAXABLE output services, then the amount of Service Tax paid on availing such services can be used by the lawyer/advocate to discharfe his output tax liability. In other words, the amount thus paid for availing input services is available as a CREDIT to settle the Output Dues of Service Tax.

It is pertinent to mention here that in case where a lawyer/advocate provides both taxable and non taxable services then he can avail CENVAT Credit of the entire amount of tax paid by him in availing the input services only if he maintains separate books of accounts for taxable and non taxable services.

In case it is not viable to maintain separate books of accounts for taxable and non taxable services then in such a case the person is eligible to take CENVAT Credit in accordance with the conditions mentioned in Rule 6(3) of the CENVAT Credit Rules, 2004.

Discussions to this article

[AJITH KAIMAL R]

Does representational services provided by a chartered accountant which has been exempt till now on levy of service tax attract the same on the enactment of the proposed budget?