EXEMPTION TO LEGAL SERVICES

[Dr. Sanjiv Agarwal]

Exemption to Services provided by an Advocate or a Person represented on and as Arbitral Tribunal

Vide Notification No 25/2012- ST dated 20.6.2012, w.e.f. 1.7.2012, services provided by-

     (a) an arbitral tribunal to -

(i)    any person other than a business entity; or

(ii)   a business entity with a turnover up to rupees ten lakh in the preceding financial year;

    (b)  an individual as an advocate or a partnership firm of advocates by way of   legal services to,-

(i)   an advocate or partnership firm of advocates providing legal services ;

(ii)   any person other than a business entity; or

(iii)  business entity with a turnover up to rupees ten lakh in the preceding financial  year; or

(c)    a person represented on an arbitral tribunal to an arbitral tribunal;

are exempt from levy of Service Tax.

What is exempt is a service provided to a non- business entity by -

(i)   individual advocates

(ii)  person represented on/as arbitration Tribunal

If the services are provided to a business entity or are provided by advocate firm or law company or by any person who is not a arbitral Tribunal, it will be subjected to levy of service tax subject to monetary limit.

Definitions

Section 2(1)(a) of Advocates Act, 1961 defines ‘advocate’ means an advocate entered in any roll under the provisions of this Act. As per Wikipedia an advocate is a term for a professional lawyer used in several different legal systems.

‘Arbitral Tribunal’ as per section 2(1)(d) of the Arbitration & Conciliation Act, 1956 means a sole arbitrator or a panel of arbitrators. Under section 2(1)(a), arbitration means any arbitration whether or not administered by permanent arbitral institution.

‘Business entity’ has been defined in section 65B(17) to mean any person ordinarily carrying out of any activity relating to industry, commerce, business or profession.

‘Legal services’ are defined in Notification No 25/2012-ST to mean any service provided in relation to advice, consultancy, or assistance in any field of law, in any manner and includes representation services before any court, tribunal or authority 

         Advocates can provide services either as individuals or as firms. Legal services provided by advocates or partnership firms of advocates are exempt from service tax when provided to the followings:

• an advocate or partnership firm of advocates providing legal services (same class of persons)
• any person other than a business entity
• a business entity with a turnover up to rupees ten lakh in the preceding financial year

However, in respect of services provided to business entities, with a turnover exceeding rupees ten lakh in the preceding financial year, tax is required to be paid on reverse charge by the business entities. Business entity is defined in section 65B of the Finance Act, 1994 as 'any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession'. Thus it includes sole proprietors as well. The business entity can, however, take input tax credit of such tax paid in terms of Cenvat Credit Rules, 2004, if otherwise eligible. The provisions relating to arbitral tribunal are also on similar lines.

Taxability Matrix

Service Provider	Service Receiver	Taxability
Individual Advocate  / Firm*	Individual Advocate  / Firm	Exempt (Notification No. 25/2012-ST ) – 6 (b) (i)
Individual Advocate  / Firm*	Any person other than business entity	Exempt (Notification No. 25/2012-ST ) – 6 (b) (ii)
Individual Advocate  / Firm*	Business entity with turnover up to Rs 10 lakhs in preceding financial year	Exempt (Notification No. 25/2012-ST ) – 6 (b) (iii)
Individual Advocate   / Firm*	Business entity with turnover > Rs 10 lakhs in preceding financial year	Taxable under Reverse charge (Notification No. 30/2012-ST)
Legal service provider being business entity other than Individual /  firms	Any person	Taxable in ordinary course
Arbitral Tribunal	Arbitral Tribunal	Exempt (Notification No 25/2012-ST) S. No. 6 (c)
Arbitral Tribunal	Any person other than business entity	Exempts (Notification No 25/2012-ST) S. No. 6 (a) (i)
Arbitral Tribunal	Business entity up to turnover of Rs 10 lakhs in previous financial year	Exempts (Notification No. 25/2012-ST) S. No. 6 (a) (ii)
Arbitral Tribunal	Business entity with turnover > Rs 10 lakh in previous financial year	Taxable under reverse charge (Notification No.  30/2012-ST)

* Includes Limited Liability Partnership (LLP)

Arbitral tribunal comprising more than one arbitrator will constitute an entity by itself. Thus services of individual arbitrator when represented on such an arbitral tribunal will also constitute service by one person to another. However, such service is exempt under Sr. No. 6(c) of the mega notification.

Payment of Service Tax

Individual advocates and arbitral tribunals are not required to pay service tax on the services provided by them. Such persons providing exempt services need not charge service tax in invoices. However, when such services are provided to a business entity, the business entity is required to pay service tax under reverse charge and it can take input tax credit of such tax paid. (Refer Notification No. 30/2012-ST dated 20.6.2012). In case of liability of payment of service tax under reverse charge, advocates may not charge service tax in their bill and it will be the liability of service recipient business entity to pay service tax in the gross amount changed by legal service provider. However, it would be desirable for the service provider to mention a note at the foot of the invoice that service tax shall be payable by recipient under reverse charge at applicable rates and above amount does not include Service Tax. The following note may be used –

“Since Service Tax is payable under reverse charge by the recipient of our legal services, in terms of Notification No. 30/2012-ST, the bill amount does not include Service Tax”

This may be necessary as if the advocates charge Service Tax in the invoice, where they are not supposed to pay, accounting may pose a problem.  However, there could be an issue on it being a proper invoice for the purpose of Service Tax and Cenvat Credit.

 

 

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Discussions to this article

[Ramanujam Varadarajan]

Please clarify on the application of the term 'business entity with a turnover upto Rs. 10 lakhs in the preceding financial year'  -

i.  Is it refers to the Business turnover of the business entity?

ii. is it refer the amount of billing by the concerned individual advocate/firm on the business entity during the preceding financial year?

As service tax is required to be paid by the Business entity on reverse charge basis, proper understanding of the above term is primary.  

[DEV KUMAR KOTHARI]

Earlier we had concept of 'legal services' and aspect of service by advocate was not very relevant. Other professionals who render similar legal services should also be exempted from chargeability of service tax, otherwise there is no reason to tax a company secretary on fees received for incorporation of a company and  not taxing an Advocate for similar services (may be taxed in hands of newly incorporated co).

All services where service providers are large in number (like all professionals, self employed service providers, contractors, sub contractors, brokers, commission agents, property owners etc.) and service receivers are much less in number (Like factories, Companies, Banks, MF,...) can be brought under reverse charge method. Furthermore service receivers who are more organised and large organisations can be made liable to pay full service tax. In this catagory of service providers we can consider all professionals including advocates, CA,CMA,CS, all self employed people rendering  various services as contractors and sub contractors, owners of commercial properties letting out properties etc. This will reduce burden of compliance by small service provider.This will improve tax collection and make collection and control easy becasue number of people from whom service tax is collectible will be reduced. Services of many small service providers who are exempted due to exemption limit will also become taxable in hands of service receiver. 

Control over payment of service tax and credit for CENVAT shall also be easy and beter  becasue the perosn availing CENVAT himself will be responsible for payment of ST under reverse charge method to a large number of small service providers who rendered services to the service receiver).

In such reverse charge method, even advocates will not be un-happy becasue they do not bother for cost of client but have objection if they are made liable for compliance. Similarly is case of other professionals and small service providers. The administrative burden should be  shifted  on service receivers (who are large organisations) and have set up  and can strengthen organisation, in case of need to meet all such obligations whereas small service providers do not have such facilities and cannot afford to have such organisational facilities  in their small organisation.