Volume 5, Issue 16
10th August, 2012 |
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Implications of Service Tax on advocates / law firms under the new
regime |
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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
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*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-
- 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.
- 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.
- 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:
- 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.
- 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.
- 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. |
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