Budget 2009: Levy service tax on legal services and not on any particular profession.

[C.A. DEV KUMAR KOTHARI]

Legal services and not any particular profession:

Legal services may be rendered by any person in a professional capacity belonging to any profession or even by experienced persons. We find different type of legal  service providers like  advocates, solicitors , legal counsels, pleaders, notary public, muharis, Advocate on record, Barristers, CA, CWA, CS and even experienced persons in field of law are rendering such services.

We also find that some Indian and foreign companies are also rendering legal services through their establishments.

It appears that considering this factual aspect legal services have been proposed for bringing under tax net instead of any particular profession.

Business entity:

Perhaps for the first time a new expression used in relation to service provider and service receiver both and in both cases it is "business Entity". To be taxable service, the service provider as well as service receiver should be a "business Entity". Individuals are expressly excluded from the scope of Business Entity. Therefore, an individual carrying profession in a proprietary concern shall also be exempt. Applying common sense, a business entity shall also not include charitable institutions because it may be an AOP or BOI but it is not a business entity as generally understood. Therefore, such institutions extending legal aid or availing legal services should also not be taxable.

 

 Legal Service:

In the Finance Act, 1994 in the provisions relating to service tax new insertions have been proposed to bring into taxable category as separate service. Therefore, so far legal services are concerned, any service provided by CA, CWA and CS shall also be governed by the new category,(when it is notified) because he is rendering a legal service and some of  such services are specially recognized and are covered by exemptions granted in relevant notifications. After coming into force of new service, the individual CA, CWA, CS, and any other individual rendering legal service shall not be liable to pay service tax on such legal services.

Relevant provisions as proposed are reproduced below to give the picture of effective legal provision on its implementation with highlights:

Clause 112. In the Finance Act, 1994, -

(A) in section 65, save as otherwise provided, with effect from such date as the Central Government may, by notification in the Official Gazette, appoint,—

XXXX

3) in clause (105), -

c) after sub-clause (zzzzj), the following sub-clauses shall be inserted, namely:—

xxxx

(zzzzm) 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.

Explanation.—For the purposes of this sub-clause, "business entity" includes an association of persons, body of individuals, company or firm, but does not include an individual;';

(B) in section 66, with effect from such date as the Central Government may, by notification in the Official Gazette, appoint, for the word, brackets and letters "and (zzzzj)", the brackets, letters and word ", (zzzzj), (zzzzk), (zzzzl) and (zzzzm)" shall be substituted;

The effective part of clause shall on insertion read as follows:

SECTION 65. Definitions. - In this Chapter, unless the context otherwise requires, xxxxx

(105) "taxable service" means any service provided or to be provided:

(zzzzm) 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.

Explanation.—For the purposes of this sub-clause, "business entity" includes an association of persons, body of individuals, company or firm, but does not include an individual;'

Speech of honorale Finance Minister on this aspect was as follows:

133.     As133. As the Hon'ble Members are aware, services provided by chartered accountants,,the, cost accountants, and company secretaries as well as by engineering and management consultants are presently charged to service tax.  Although there is a school of thought that legal consultants do not provide any service to their client, I hold my distinguished predecessor in high esteem and disagree!  As such, I propose to extend service tax on advice, consultancy or technical assistance provided in the field of law.  This tax would not be applicable in case the service provider or the service receiver is an individual.

(** Per author: It is not clear as to whose thought that  legal services is not a service was referred to by the FM. If readers come across any published material on this aspect, kindly inform)

Tax is  on any particular profession but on a service:

From above provisions ,  the speech of the Finance Minister and preliminary discussion in this article  it is clear that it is not a particular profession or a person holding certificate of practice from a professional institution but a particular type of service that has been made taxable. The taxable entity will be any AOP, BOI, Firm or company.  In absence of specific definitions of the terms AOP and BOI these  may include in their  sweep A HUF as well as a co-operative society.

Taxable Service provider and service receivers:

Taxable service provider should be  a 'business entity' that is AOP, BOI, Firm or company.

Taxable service receiver should also be a business entity that is AOP, BOI, Firm or company.

A non business entity as service provider will not be taxable.

Similarly a legal service provided by a business entity to a non business entity or individual  will also not be taxable.

Business entity vis a vis non business entity:

The definition of business entity has been given in an inclusive manner. However, it is subject to context. Therefore, first of all it should be a business entity in its general and commercial sense and should be known as a business entity.

As per general and commercial understanding a charitable institution rendering legal assistance to any person shall not be taxable because it may be an AOP or BOI but it is not a business entity. Business Entity must be a profit making organization as generally understood. Furthermore legal services in nature of assistance provided to general people. Poor people, for public cause etc. are generally services rendered to an individual. Therefore, on that ground also the service shall not be taxable.

Individuals:

Legal service provided by an individual whether he be an advocate, barrister, solicitor, pleader or even a CA, CWA and CS will not be taxable. However, firms of such persons, or companies or associations shall be taxable. The expression 'Business entity' is used for the service provider as well as service receiver. As per Explanation to new clause "business entity" does nto include an individual. Therefore, service provided by an individual is exempt as well as service provided to an individual is exempt.

Appearance exempted:

As per proviso any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service. This will raise disputes because the revenue will try to argue that only fees for appearance will be exempt and not  fees related with consultations, preparation of written notes, paper book etc.  Whereas the service provider may argue that any service which is in relation to appearance before court or authority is exempt as without such work one cannot appear before court or authority. Thus precondition is filing and preparation of case as these are preconditions for appearance these services should be exempted. In case of CA, CWA and CS similar exemption has been allowed by way of notifications. In case of new service that has been placed on the statue book itself. This is a good measure in the area of drafting of complete provision instead of leaving something to be done under delegated authority.

Law practice is mostly  individual based:

In practice we find that major part of  legal services are individual based. Even when a client hire service of a firm of Advocates, particular type of matters or particular clients are looked after by an individual partner of the firm. Only in case of brain storming exercises conference with two or more partners are exercised. Therefore, it can be made out a case that service is rendered by an individual to a client. For example suppose Law firm is retained as a solicitor, for IT matters client deal with Mr. I, for Company law matters with Mr. C. In case of need matter is taken to senior counsels (Sr.C) who appear before courts. Mr. I, Mr. C and Mr. Sr. C  all are individual. The charge  levied on client are generally in nature of fees of particular person, and may include fees of individual and administrative and infrastructural costs of the AOP, BOI, FIRM or COMPNAY.

For example, suppose a client consult a senior partner of firm then fees is say Rs.25000 /- and in case of Junior partner it is say Rs.10000/- and in case of an employee it is Rs.5000/- The varying fees is dependent on the individual. It is not the case that  a big firm will charge uniform fees irrespective of the person with whom consultation is made. Even when tow or more partners or executives of law firm are consulted, the fees may be dependent on the two partners with whom consultation has taken place.

Proprietary concerns of individual shall also be exempted as an individual:

An individual may carry profession in a  professional firm name say M/s A & Co. proprietor Mr. A In such case the proprietary concern shall not be affirm but it will be treated as an individual because it is not a firm of two or more persons. Therefore, whether practice is carried in name of Mr. A or A & Co. (prop. Mr. A will make no difference and the exemption shall be available.  

Franchises can be  a way out to reduce service tax liability:

Larger business entities like  law firms AOP, BOI  or companies may have to think of franchise system. Under franchise system they may permit an individual to render service with backing of legal support and brand name. Thus an individual may render legal service in his personal capacity with addition of prefix under professional support of  Law Franchisor. In that cas4e only the franchise fees will be taxable service.

The readers may also refer to another article "SERVICE TAX ON LEGAL SERVICES - NOT A TAX ON ADVOCATES" by Dr. Sanjiv Agarwal hosted on this website for discussions on some of earlier notifications etc.