Volume 5, Issue 16


10th August, 2012


Tax Alert
Implications of Service Tax on advocates / law firms under the new regime

Legal consultancy services rendered by a company, firm, association of persons and body
of individuals were first brought under Service Tax net from 1st September, 2009. Initially, the services included advice, consultancy or assistance, but excluded representational services. The scope was then widened w.e.f. 1st May, 2011 to include representational services also. However, individual advocates were never brought under the tax net.

Until 1st July, 2011 , the liability to pay Service Tax was on receipt basis for all assesses, however once the Point of Taxation Rules, 2011 were notified, the liability to make payment of Service Tax was shifted from receipt basis to accrual basis (raising of invoice or receipt of advance, whichever is earlier). However as per Rule 7 of Point of Taxation Rules, 2011, for specified service providers ( eight service providers which includes persons providing legal services), the liability to make payment of Service Tax was on receipt basis only, provided payment is made by the service receiver within 6 months from the date of invoice. If the payment is not received within the period of 6 months by legal service providers, then the taxable event shall be governed by Rule 3 of the said Rules, which states that liability to pay Service Tax shall be raising of invoice (if the same is raised within the period of 14 days from the completion of service) or the date of completion of service (if the invoice is not raised within the period of 14 days from the completion of service).

However, the said Rule 7 of Point of Taxation Rules, 2011 was amended w.e.f. 1 April 2012 and the clause on point of taxation for specified service providers being on receipt basis was omitted. Accordingly, the liability to pay Service Tax in such cases is governed by Rule 3 of the said Rules w.e.f. 1 April 2012 subject to specific exemptions which are detailed below.

The Finance Act, 2012 has brought about a paradigm shift in levy of Service Tax from selective list of taxable services to all, encompassing all the activities, barring the exclusions from definition of service, Negative list and Exemptions which is effective from 1st July, 2012. The synopsis of the taxability under new Service Tax regime for persons providing legal services is given below:

Category of Service Provider Category of Service Recipient Taxability
Individual advocate or  partnership firm of advocates An advocate or partnership firm of advocates Exempted Service
Individual advocate or  partnership firm of advocates Any person other than Business entity Exempted Service
Individual advocate or  partnership firm of advocates Business entity with a turnover up to Rs 10L in the preceding financial year Exempted Service
Individual advocate or  partnership firm of advocates Business entity with a turnover above Rs 10L in the preceding financial year Taxable service*
Business Entity To any recipient mentioned above Taxable Service

 

Facts

  • Assessees are investment and trading companies.
  • They issued

*In such a case, business entity is liable to discharge Service Tax, as a recipient of service (reverse charge basis)

Also in few cases as mentioned below, legal service providers shall be liable to pay Service Tax on services availed, under Reverse charge basis:

  • Services provided by the Government eg. postal services, transport of passengers or goods, etc.
  • Any taxable service provided or agreed to be provided by any person who is located in non-taxable territory to any person located within the taxable territory.
  • Service provided by a goods transport agency in respect of transportation of goods by road when the freight is paid by the business entity.

In addition to above, in case of business entity which avails certain specified services, then the former shall be liable to Service Tax on reverse charge basis.

SKP’s comments
As discussed above, since individuals or firm providing legal services are not liable to service tax in majority of the cases, Service Tax credit availed on various input services shall remain unutilized since there may not be any output service tax liability. To claim the unutilized credit, a new Rule 5B is inserted in Cenvat Credit Rules, 2004 which allows refund of such unutilized credit for service providers whose services are being taxed in the hands of service receivers. Accordingly, the said service providers may ascertain the amount of Service Tax on availing various input services and file a refund claim subject to procedures and conditions. 

In cases, where individuals or firm providing legal services to a business entity located outside India having turnover of above Rs 10L but where the place of provision of service is within the taxable territory, the service cannot be said to be an exempt service and also reverse charge cannot be applied since the service receiver is outside India. In such cases it would be relevant to ascertain as to who is liable to pay Service Tax and typically if the receiver is not in a position to pay Service Tax , the provider of service shall be liable to discharge Service Tax.

Point of Taxation for legal services-

  1. Prior to 31.03.2012-
    • For services provided till 31st March, 2012, point of taxation was on basis of the receipt of payment from the service receiver. The rate of Service Tax prevailing till 31st March, 2012 was 10.30% which was subsequently increased to 12.36% from 1st April, 2012 and due to change in rate there was an issue whether new rate would be applicable for services rendered prior to change in rate and payment received post change in rate.  
    • To clarify this, Circular No. 158/9/2012 dated 8th May, 2012 was issued by CBEC which stated that for eight specified services which were rendered prior to 31st March, 2012 and payment received post that date, the rate of Service Tax shall be 12.36% and service provider has to recover additional 2% by issuing a supplementary invoice.
    • The said Circular was challenged in the case of Delhi Chartered Accountants’ Society (Regd.) v Union of India (2012) 24 taxmann.com 62 (Delhi) and the Court held that the said Circular is contrary to the provisions of Rule 4 of the Point of Taxation Rules, 2011 and rate of Service Tax shall be 10.30% only.

      Given this, it would be relevant for legal service providers to examine whether Service Tax is discharged at 10.30% or 12.36% on consideration received post change in rate for services rendered prior to 31st March, 2012.
  1. During the period 1st April, 2012 to 30th June, 2012

    Legal service providers shall, irrespective of the amount of turnover of taxable service in the previous year, be liable to pay service tax on the accrual basis, i.e as per Rule 3 of Point of Taxation Rules, 2011.

  2. On and after 1st July, 2012

    Provisions of Rule 6 of Service Tax Rules, 1994 dealing with payment of Service Tax are amended w.e.f  1st July, 2012, to provide relief to an individual or partnership firm whose taxable turnover in the previous financial year is less than Rs. 50L to discharge Service Tax on the basis of receipt of payment upto total of Rs.50 lakhs in the current financial year. And once the said limit is crossed, Service Tax has to be charged as per provisions of Rule 3 of Point of Taxation Rules, 2011.

In light of the above, legal service providers may consider the following points which might be critical:

  1. All the payments with respect to Service Tax arising on services provided during the period 1st April, 2012 to 30th June, 2012 have been paid on accrual basis irrespective of the turnover in the previous financial year.
  2. No service tax is paid to the authorities in respect services provided during the period 1st April, 2012 to 30th June, 2012 whose consideration is received on or after 1st July, 2012 if the turnover is less than Rs. 50L in the previous financial year.
  3. Claim exemption from Service Tax for services rendered post 1st July, 2012, if available.

It may be advisable to prepare a reconciliation statement to capture the above cases, in order to avoid double taxation.

Given the above, law firms should take stock of impact on their financials due to introduction of Negative list regime. It is critical for legal service providers to revisit the tax position adopted and review the business model and gear up their IT systems to benefit from the new provisions.