CHANGE IN EXEMPTION FOR LEGAL SERVICES

[Dr. Sanjiv Agarwal]

Services provided by advocates or a persons represented on and as Arbitral Tribunal are exempt from levy of Service Tax under Entry No. 6 of Notification No. 25/2012-ST dated 20.06.2012. According to this entry,

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)  a 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;

This exemption has undergone an amendment w.e.f. 1^st April, 2016 vide Notification No. 9/2016-ST dated 1.3.2016.

Amendment w.e.f. 1.4.2016 for services of senior advocates (Vide Notification No. 9/2016-ST dated 1.3.2016)

The following amendments have been made in Entry No. 6 to curtail the scope of exemption-

1. Clause (b) has been substituted as under –

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

1. an advocate or partnership firm of advocates providing legal services;
2. any person other than a business entity; or
3. a business entity with a turnover up to rupees ten lakh in the preceding financial year; or

2. Clause (c) has been omitted and new clause (c) substituted as under -

(c)  a senior advocate by way of legal services to a person other than a person ordinarily carrying out any activity relating to industry, commerce or any other business or profession.

The above amendment shall be effective from 1.4.2016. W.e.f. 1.4.2016 vide Notification No. 9/2016-ST dated 1.3.2016 - entry No. (6) in exemption Notification No. 25/2012-ST has been amended to provide that exemption in respect of the following services has been withdrawn -

• Services provided by a senior advocate to an advocate or partnership firm of advocates, and
• A person represented on an arbitral tribunal to an arbitral tribunal;

By this amendment, exemption from Service Tax has been withdrawn on services provided by senior advocates to other individual advocates or law firms w.e.f. 1.4.2016. Senior advocates are generally engaged by other law firms or individual advocates to handle on their behalf their matters which are complex, to solicit the benefit of their expertise and experience. In such cases, total costs will go up with the amount of Service Tax and cesses (15 percent) and  such Service Tax shall be payable on forward charge basis, unlike reverse charge in other legal services where Service Tax is deposited by service receiver, being business entity. Thus the Service Tax would be collected and deposited by the senior advocate.

Vide Circular No. 193/03/2016-ST dated 18.05.2016, CBEC has  clarified that Service Tax liability for services provided by an arbitral tribunal (including the individual arbitrators of the tribunal) shall be on the service recipient if it is a business entity located in the taxable territory with a turnover exceeding rupees ten lakh in the preceding financial year.

Meaning of Advocate and Senior Advocate

The word ‘advocate’ has defined under clause 2(a) of Notification No. 25/2012-ST, dated 20-6-2012 and according to which advocate has the meaning assigned to it in clause (a) of sub-section (1) of section 2 of the Advocates Act, 1961.

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.

'Senior advocate' as defined in section 16 of the Advocate Act, 1961 shall be considered for the purpose of this entry. Accordingly, an advocate may, with his consent, be designated as senior advocate if the Supreme Court or a High Court is of opinion that by virtue of his ability 1[standing at the Bar or special knowledge or experience in law] he is deserving of such distinction, and

An advocate of the Supreme Court who was a senior advocate of that Court immediately before the appointed day shall, for the purposes of this section, be deemed to be a senior advocate: Provided that where any such senior advocate makes an application before the 31st December, 1965 to the Bar Council maintaining the roll in which his name has been entered that he does not desire to continue as a senior advocate, the Bar Council may grant the application and the roll shall be altered accordingly. Thus, anybody who is a 'senior advocate' in terms of section 16 of the said act shall not be eligible for exemption under this entry and shall pay service tax on forward charge basis by collecting from service recipient and paying to the credit of Central Government. Thus, anybody who is a 'senior' advocate' in terms of section 16 of the said Act shall not be eligible for exemption under this entry and shall pay Service Tax on forward charge basis by collecting from service recipient and paying to the credit of Central Government.

Taxability Matrix for Legal Services (w.e.f. 1.4.2016)

Service Provider	Service Receiver	Taxability
Individual Advocate / Firm	Individual Advocate / Firm	Exempt
Individual Advocate / Firm	Any person other than business entity	Exempt
Individual Advocate / Firm	Business entity with turnover upto ₹ 10 lakh in preceding financial year	Exempt
Individual Advocate / Firm	Business entity with turnover > ₹ 10 lakh in preceding financial year	Taxable under reverse charge
Senior Advocate	Individual Advocate / Firm	Taxable under forward charge
Senior Advocate	Any business entity	Taxable under forward charge
Senior Advocate	Any person other than business entity	Exempt
Arbitral Tribunal	Arbitral Tribunal	Taxable
Arbitral Tribunal	Any person other than business entity	Exempt
Arbitral Tribunal	Business entity up to turnover of ₹ 10 lakhs in previous financial year	Exempt
Arbitral Tribunal	Business entity with turnover > ₹ 10 lakhs in previous financial year	Taxable under reverse charge

Service tax in the case of senior advocates would be levied under forward charge. However, the existing dispensation regarding legal services provided by a firm of advocates or an advocate other than senior advocate has been continued. In contrast, in case of rest of the legal fraternity, i.e. other advocates and law firms, Service Tax will continue to be discharged under the reverse charge mechanism.

Though legal services are subject to payment of Service Tax under reverse charge basis, there is a threshold exemption of ₹ 10 lakh value of services available to a business entity. 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. If business entity pays Service Tax  under reverse charge, it can take input tax credit of such tax paid in terms of Cenvat Credit Rules, 2004. Legal service is input service as per definition of Rule 2(1) of Cenvat Credit Rules, 2004. The Cenvat credit cannot be used for payment of Service Tax in respect of services where the person liable to pay tax is the service recipient. However, Service Tax discharged under reverse charge on legal service can be used as Cenvat credit for discharging the Service Tax liability on output taxable e services and Central Excise duty.

Notification No. 30/2012-ST governing payment of Service Tax under reverse charge has been suitably amended vide Notification No. 18/2016-ST dated 1.3.2016 to exclude services of senior advocates to individual advocate or firm of advocates by way of legal services from payment of Service Tax under reverse charge. Under forward charge mechanism, senior advocates would be able to claim or avail cenvat credit for service tax.

Stay by Court

Agitated on such withdrawal of exemption, senior advocates and  bar associations have filed petitions before various high courts in the country, some of which have granted stay on the ground that introduction of Service Tax on legal fee of senior advocates was unconstitutional and that advocates or law firm who engage senior advocates would not be able to  avail cenvat credit which is a sort of double taxation. Delhi, Calcutta and Gujarat High Courts have stayed the levy of Service Tax vide Delhi High Court stay Order in W.P. 2892/2016 and W.P. 2891/2016 filed by M/s. Delhi High Court Bar Association [2016 (5) TMI 846 - DELHI HIGH COURT]; Gujarat High Court Stay Order dated 20.03.2016 in SCA No. 4296/2016 and Calcutta High Court Stay Order in W.P. No. 291/2016 [ 2016 (4) TMI 398 - CALCUTTA HIGH COURT ].

CBEC has decided to file a petition for transfer in the Supreme Court against the High Court orders and get these stays vacated.

Discussions to this article

[Dr. Sanjiv Agarwal]

Readers may note that post submission of this article, CBEC has issued three more Notification Nos. 32, 33, 34 - All dated 06.06.2016 amending exemption Notification, Service Tax Rules (Person Liable) and Reverse Charge in relation to services provided by Senior Advocates to Business Entities. The effect of these Notifications is not captured in this Article.

[vikral choudhary]

Sir, please clarify the cenvat credit and double taxation point and whether this is valid?