Mukul Sharda

MukulHonorable Finance Minister Mr. Arun Jaitley has announced Union Budget 2016-17 and made certain changes in Mega Exemption list (Notification 25/2012 – Service tax dated 20th June, 2012), Abatement list (Notification 26/2012 – Service tax dated 20th June, 2012), Reverse charge Mechanism (Notification 30/2012 – Service tax dated 20th June, 2012), Service tax rule, 1994, Point of Taxation Rule, 2011 and certain major changes.

However vide Notification No. 9/2016 and 18/2016 dated 1st March, 2016 has made amendment in Notification No. 25/2012 and 30/2012 dated 20th June, 2012 respectively. Through this amendment the government has charged service tax on service provided by senior advocates on forward basis (i.e. service tax will be charged by senior advocates to their clients). Hence, they can utilize their Cenvat Credit by output service tax.

Brief analysis of the service provided by senior advocate is here below:

Earlier entry no. 6 of notification no. 25/2012, which exempts certain services from service tax, reads as:-

Before Budget i.e. 1st March, 2016After Budget i.e. 1st March, 2016
Services provided by-

(a) an arbitral tribunal to –

(i) ……………………..

(ii)………………………

(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”

 

 

Services provided by-

(a) an arbitral tribunal to –

(i) ……………………..

(ii)………………………

(b) a partnership firm of advocates or an individual as an advocate other than a senior advocate, 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 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

“Senior advocate has the meaning assigned to it in section 16 of the Advocates Act, 1961”.

And in clause (iv) , for item (B) of notification no. 30/2012, which makes liability of service receiver to pay service tax instead of service provider reads as :-

Before Budget i.e. 1st March, 2016After Budget i.e. 1st March, 2016
“provided or agreed to be provided by

(A) an arbitral tribunal, or

(B) an individual advocate or a firm of advocates by way of support services to any business entity located in the taxable territory”

“provided or agreed to be provided by

(A) an arbitral tribunal, or

(B) a firm of advocates or an individual advocate other than senior advocate, by way of legal services to any business entity located in the taxable territory.

“senior advocate‟ has the meaning assigned to it in section 16 of the Advocates Act, 1961

Analysis of notifications before Budget

The combined reading of the notification 25/2012 and 30/2012 of before budget results that:-

1. No service tax will be levied on services provided by advocate or firm of advocates on service provided to :-

(i) Advocate or firm of advocates,

(ii) Any person other than business entity

(iii) A business entity with a turnover of upto Rs ten lakh in preceding financial year

2. And service tax will be levied on service provided by advocate or firm of advocates to any business entity having a turnover of more than ten lakh and that service tax has to be paid under reverse charge mechanism. Therefore, there will be no output service tax liability on advocate or firm of advocates. Advocate or firm of advocate must have availed some inputs, input services to provide the above taxable service. Being no output service tax of advocates or firm of advocates they will not be able to utilize the Cenvat credit available to them.

3. Advocates can take Cenvat credit as per Rule 3 of Cenvat credit rule, 2004 but they cannot utilize the same because they have no output service tax. Since they are unable to utilize the same, they should be eligible for refund. In Cenvat credit rule, 2004 there are two situations when provider of output service can take refund of Cenvat credit:-

(i) When manufacture of goods or provider of output service is exporting goods or services under Rule 5 of Cenvat Credit Rule, 2004.

(ii) When service providers providing services taxed on reverse charge basis under Rule 5B of Cenvat Credit Rule, 2004.

Advocate or firm of advocate cannot take benefit of rule 5 until and unless they are exporting their services, but they can take benefit or rule 5B.

4. Notification 12/2014- Central Excise (N.T.) dated 3rd March, 2014 provides procedure of refund as mentioned under Rule 5B of Cenvat credit rule, 2004. The notification states that refund shall be eligible for providing following output service:-

(i) Renting of motor vehicle

(ii) Service portion in execution of works contract.

5. Advocate of firm of advocate cannot take benefit of refund under rule 5B as notification 12/2014 does not cover legal services provided by advocate of firm of advocates.

6. Conclusion: – It is concluded that service provided by advocates are either exempt under notification 25/2012 or are payable under reverse charge mechanism under notification 30/2012. So they are unable to utilize their Cenvat credit (in relation to taxable service) and are unable to take refund. Hence the whole Cenvat Credit becomes their cost.

Analysis of notifications after Budget

The combined reading of the both notification of before budget results that:-

1. No service tax will be levied on services provided by firm of advocates or advocate other than senior advocates on services provided to:-

(i) Advocate or firm of advocates,

(ii) Any person other than business entity

(iii) A business entity with a turnover of upto Rs ten lakh in preceding financial year

2. The amendment is that legal service provided by senior advocate provided to:-

(i) Advocates or firm of advocates

(ii) Business entity.

will be chargeable to service tax on forward basis, i.e. service tax will be charged by senior advocates to the above persons. Other services provided by senior advocates shall be exempt. Hence the senior advocates have to make reversal of Cenvat Credit as per rule 6 of Cenvat Credit Rule, 2004.

3. Conclusion :- Since legal service provided by senior advocates to the above persons will be chargeable to tax on forward basis. Senior advocates will have some output liability and hence they will be able to utilize their Cenvat Credit (after reversal under rule 6 of Cenvat Credit Rule, 2004)

Final Conclusion :-

1. Earlier before budget any legal service provided by advocate or firms of advocate was either exempt or chargeable to service tax on reverse charge basis, hence they were not in a position to utilize the credit of the same. And the Cenvat Credit becomes cost to advocate or firm of advocates. After amendment, some legal services by senior advocates will be chargeable to service tax on forward charge.

2. Hence there will be some output service tax in the hands of senior advocate which they can utilize against their Cevnat Credit (after reversal in relation to exempted service). Therefore, the cost of non-utilisation of Cenvat Credit of senior advocate will be wiped off and senior advocate will get benefit in terms of utilization of Cenvat Credit.

3. It is important to note that service tax liability is only on senior advocates, other advocate or firm of advocate are still not liable to tax as per reverse charge mechanism. So other advocate or firm of advocate will not be able to utilise their Cenvat Credit and hence the same will becomes cost to them.

(Author can be reached at mukulsharda6@gmail.com)

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