CA Lalit Munoyat
Advocates were resisting being brought within the ambit of Service Tax by their argument that their basic function is to assist the Court in effective justice delivery system and while doing so they function more like officers of the Court than as service provides. They were assisting the litigants in obtaining justice and that charging of fees was just ancillary to the main object. However, appreciating the popular sense they have agreed to be so covered by the Finance Act 2012, albeit in a restricted manner.
The provisions for charging service tax on Advocates may be summarized as under:
1) The services of Advocates are not covered in the Negative List. Such that their service would be taxable if otherwise not exempted or listed in the Exempt List.
2) The Exempt List (Notification 25/2012 – ST dated 20/6/12), known as Mega Exemption deals with the service of Advocates at serial no. 6 as under
|6. Services provided by-|
|An arbitral tribunal to –|
|any person other than a business entity; or|
|a business entity with a turnover up to rupees ten lakh in the preceding financial year;|
|An individual as an advocate or a partnership firm of advocates by way of legal services TO-|
|an advocate or partnership firm of advocates providing legal services ;|
|any person other than a business entity; or|
|a business entity with a turnover up to rupees ten lakh in the preceding financial year; or|
|A person represented on an arbitral tribunal to an arbitral tribunal|
2) In this article I propose to discuss services in clause 6(b) only.
|Services provided by An individual as an advocate or a partnership firm of advocates by way of legal services TO:|
|(a)||an advocate or partnership firm of advocates providing legal services ; or|
|(b)||any person other than a business entity; or|
|(c)||a business entity with a turnover up to rupees ten lakh in the preceding financial year; or|
|(d)||a business entity with a turnover exceeding rupees ten lakh in the preceding financial year.|
|Receiver of Service||
|Person liable to pay service tax|
|(a) An advocate or partnership firm of advocates providing legal services.||Exempt||None|
|(b) any person other than a business entity||Exempt||None|
|(c) a business entity with a turnover up to rupees ten lakh in the preceding financial year||Exempt||None|
|(d) a business entity with a turnover exceeding rupees ten lakh in the preceding financial year.||Taxable||Business Entity|
a. For the purpose of analysis An advocate includes a partnership firm of advocates
b. Business Entity means any Person ordinarily carrying out any activity relating to industry, commerce or any other business or profession and includes:
an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a society, (v) a limited liability partnership, (vi) a firm, (vii) an association of persons or body of individuals, whether incorporated or not, (viii) Government, ix) a local authority, or (x) every artificial juridical person, not falling within any of the preceding sub-clauses;
c. Legal service means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority;
1) The services shall be exempt only when the service provider, in the first instance, provides legal services irrespective of the status of the receiver of the service. For example If a practicing Individual Advocate named A provides legal services to another practicing Individual Advocate named B who uses such legal services in providing legal services to his clients then, the services provided by A will be exempt under clause (a) above.
2) If B uses the input legal services not in providing further legal services but in providing some other services like imparting coaching to students of Law through conduct of coaching classes then such services –to this extent- will not be covered by clause (a) because the condition of providing legal services by B is violated.
3) However even in the case situation (2), the service will still be exempt but under clause (b). If B imparts the coaching not on a regular basis and not restricted to a select group of registered students only, then he may not be treated as a Business Entity ordinarily carrying out any activity relating to industry, commerce or any other business or profession and thus exemption will be available.
4) Moreover , in addition to his main profession of practice, if B also imparts the coaching on a regular basis such that his activities may be treated as an activity relating to industry, commerce or any other business or profession and if the value of his turnover in the preceding financial year was not more than Rs. 10 lakhs, then he will be treated as a Business Entity and the exemption will be available under clause(c)
5) But in a case similar to case (4) above with the modification that the value of turnover of B in the preceding financial year was more than Rs. 10 lakhs, then the exemption will be lost under clause (d) above and B will have to pay service tax under reverse charge as a recipient of service.
6) On the other hand If A-practicing individual advocate- provides Coaching Services to B-another individual advocate- who uses the coaching services in providing legal service , then such service shall not be covered by clause 6 of the Exempt list- not being legal services in the first instance and A will have to pay service tax under Direct Charge.
7) If A provides legal service to one brother (X) in a suit filed against his another brother(Y) relating to the division of family property, then the full value of the service will be exempt under (b), because the service recipient X will not be treated as a Business Entity even if the turnover of X exceeded rupees ten lakh in the preceding financial year.
8) However if X is running a small business of trading in miscellaneous items of food and had supplied certain items of food to Y-his own brother- on credit and Y now refuses to make payment for the supply and A-an Individual advocate- is advising X against Y for recovery of the business debts, then X becomes a Business entity and the status of services of A would be as under:
|If the turnover of X in the preceding financial year was not exceeding rupees ten lakh||Exempt|
|If the turnover of X in the preceding financial year exceeded rupees ten lakh||Taxable- service tax payable by X|
9) The levy has been explained at serial no. 7.6.1 by Guidance Note: Taxation of Services: An Education Guide issued by the CBEC as under:
|7.6.1 What is the tax liability of advocates, or arbitral tribunal in respect of services provided by them?Advocates can provide services either as individuals or as firms. Legal services provided by advocates or partnership firms of advocates are exempt from service tax when provided to the following:a) an advocate or partnership firm of advocates providing legal services (same class of persons)b) any person other than a business entityc) a business entity with a turnover up to rupees ten lakh in the preceding financial year However, 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.|
10) The answer at (a) above “an advocate or partnership firm of advocates providing legal services (same class of persons)” creates confusion than provide clarification.
a. What does the word “Class of persons” mean ?. Is it a group of identical entities ? If that be so, the following situations arise:
|(1) Individual||(2) Partnership Firm|
|(2) Partnership Firm||
b. If it means a group of entities engaged in the same type of activity then the following situations arise:
|Type of Activity of the Provider||Type of Activity of the Receiver|
|(1) Legal services||(2) Other than legal services|
|(1) Legal services||Exempt||a. Exempt if the receiver is a Non Business Entityb. Exempt if the receiver is a business entity with turnover less than rupees ten lakhs in the preceding financial year.c. Taxable if the receiver is a business entity with turnover more than rupees ten lakhs in the preceding financial year. Service tax will be payable by the receiver.|
|(2) Other than legal services||Taxable– service tax payable by the Provider– i.e. not covered by the Exempt List||Taxable–service tax payable by the Provider–i.e. not covered by the Exempt List.|
Certainly the classification given at (a) does not seem to be the intention of clarification. For all the practical purposes classification at (b) is the intention of the clarification.
EXSLUSIVE DISCUSSION: LEGAL SERVICES & SSI EXEMPTION
Applicability of SSI provisions to Legal services
Service tax, like any other indirect tax, is a destination based consumption tax born the ultimate user and collected by the provider. The core of the system is section 66B which is the charging section levying service tax @ 12% on the value of all services, other than those services specified in the negative list which are provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.
A reading of the above section makes it clear that the primary liability is on the person providing the service, though the same may be collected in a manner prescribed by the taxing authority. Section 68 prescribes the manner of collection of the tax. The manner of collection is as under:
(a) Collected 100% from the Provider- Direct Charge
(b) Collected 100% from the Receiver- Reverse Charges ( discussion follows)
(c) Collected partially from both, the provider and the receiver, – Partial Reverse Charge-2012
SSI exemption Notification No. 33/2012 – dated the 20th June, 2012 provides as under:
1) This notification exempts taxable services of aggregate value not exceeding Rs. 10 Lakhs in any financial year from the whole of the service tax leviable thereon under section 66B of the said Finance Act subject to conditions, inter alia as under:
a) the aggregate value of taxable services rendered by a provider of taxable service from one or more premises, does not exceed ten lakh rupees in the preceding financial year.
b) The notification does not apply to such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules,1994. (Payment under Reverse Charge)
c) Aggregate value means the sum total of value of taxable services charged in the first consecutive invoices issued or required to be issued, as the case may be, during a financial year but does not include value charged in invoices issued towards such services which are exempt from whole of service tax leviable thereon under section 66B of the said Finance Act or under any other notification.
d) The provider of taxable service has the option not to avail the exemption contained in this notification and pay service tax on the taxable services provided by him.
2) It is worthwhile to note that this notification does not apply to the services notified pursuant to section 68(2). Notification No. 30/2012 dated 20th June 2012 has notified “Services provided or agreed to be provided by an individual advocate or a firm of advocates by way of support services to any business entity located in the taxable territory” .
“Support services have been defined in section 65B of the Act as infrastructural, operational, administrative, logistic marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of movable or immovable property, security, testing and analysis.”
Reading this notification further down where it prescribes the extent of service tax payable by the recipient , it is noticed that at serial no. 5 it is mentioned that 100% of the tax shall be payable by the recipient of services provided or agreed to be provided by individual advocate or a firm of advocates by way of legal services.
Given the nature of services and the context in which they have been described the services provided by advocates can generally be Legal Services and not Support Services and there appears to be a drafting error in the notification 30/2012 unless meant otherwise by the statute.
Continuing further assuming the services as Legal Services. For example if the recipient had received legal services worth Rs. 1000/- he had to compulsorily pay the service tax on this paltry amount even if he had no business activities. Thus he was required to observe all the formalities including obtaining service tax registration just for the purpose of making payment of service tax. The cost of compliance was unanticipated and largely avoidable.
3) In order to obviate this difficulty an exception has been carved out in case of Legal services covered by the Exempt List by Notification No. 25/2012-20th June 2012. Accordingly where Services are provided by an individual as an advocate or a partnership firm of advocates by way of legal services to a business entity with a turnover up to rupees ten lakh in the preceding financial year, then service tax is not payable by any one.
4) A combined reading of these 2 notifications i.e. 25/2012, 30/2012 both dated 20th June 2012 leads us to the following conclusion::
a) Notification 25/2012 dated 20th June 2012 enlarges the scope of notification 30/2012 by specifying the size and the status of the recipient of the legal service. A combined reading of both these notifications provides as under:
i. Service tax in respect of legal services shall be payable 100% by the recipient of such legal service if the recipient is a business entity and if the value of his turnover in the preceding financial year was more than Rs. 10 lakhs.
ii. But in a case where the value of the turnover of the recipient in the preceding financial year was not more than Rs. 10 lakhs then service tax is not at all payable, either by the provider or the receiver.
5) As already stated SSI Notification No. 33/2012 dated 20th June 2012 does not apply to such value of taxable services which have been notified pursuant to section 68 (2) (i.e. by Notification 30/2012). Legal services have been so notified.
6) Legal Services will become taxable only when these services are provided by an individual as an advocate or a partnership firm of advocates to a business entity with a turnover exceeding rupees ten lakh in the preceding financial year.
7) In a nutshell all the propositions may be summarized as under:
a) SSI exemption applies to the provider of the taxable services and not to the recipient of the services.
b) In case of legal services provided by advocates, the services will be exempt except when the recipient is a business entity with a turnover exceeding rupees ten lakh in the preceding financial year.
c) Even in the above case when the service becomes taxable the advocates will not be required to pay service tax but the same will be paid by the business entity.
d) All the recipients of the legal service would have been obliged to discharge the service tax liability in terms of notification 30/2012 without and basic exemption had it not been due to the provisions of notification 25/2012 which has carved certain basic exemption based on the turnover of the recipient in the preceding financial year
e) Both the notifications 33/2012 & 25/2012 operate in different spheres. While SSI notification 33/2012 applies to providers of legal service (but the same is to be used very rarely except when the advocate also provide non legal service like Coaching), the benefit of notification 25/2012 is available to recipient of the legal service in so far as it provides exemption under certain specified condition.
f) If an advocate provides Coaching Services also in addition to legal services then some issue may arise as to the applicability of SSI exemption to the advocate. Say, if the value of legal services which become taxable under above circumstance , though payable by the recipient is. Rs. 15 Lakhs and the valuation of Coaching services is Rs. 1 lakhs, then the total valuation of taxable service becomes Rs. 16 lakhs and the advocate will have to pay service tax on coaching service of Rs. 1 lakhs and the SSI exemption will not be available to him because the value to total taxable services have already exceeded Rs. 10 lakhs irrespective of the fact as to who paid the service tax on legal service.
8) The business entity which pays service tax under this class i.e. Legal Services can, however, take input tax credit of such tax paid in terms of Cenvat Credit Rules, 2004, if otherwise eligible.
9) The provisions relating to arbitral tribunal are also on similar lines. A person serving as a member of an arbitral tribunal comprising many arbitrators and receiving an amount from the arbitral tribunal then such service is exempt under sr. no. 6(c) of the mega notification.
The above write up is the absolute personal opinion of the writer and does not amount to an expert legal opinion. It may or may not depict the legal position sought to be conveyed by the statute. Readers are cautioned to evaluate the actual legal position before acting on this write up. Further, this write up is meant only for an academic interest and not for any other purpose .
|CA LALIT MUNOYAT|
|B.Com.(Hons.), CS, FCA, DISA|
|28th June 2012|