Service Tax on RCM basis on services provided by Advocates & by arbitral tribunal

Applicability of Service Tax payment on Reverse charge mechanism (RCM) basis on services provided by Advocates and by an Arbitral tribunal

Introduction: This article discusses in detail about a query relating to  the applicability of Service Tax payment on Reverse charge mechanism ( RCM) basis on services provided by Advocates and by an Arbitral tribunal.

Query :

Generally, the liability to pay Service tax is on the service provider.  However, in respect of certain specified services (including legal services), the liability to pay Service tax is on the service recipient under the partial reverse charge mechanism.

Further, in terms of Notification 25/2012-ST dated 20 June 2012 (referred to as ‘the Mega Exemption Notification’), legal services provided by an individual as an advocate or a partnership firm of advocates to a business entity, who has a turnover of up to INR 10 Lakhs in the preceding financial year, is exempt from Service tax.

In light of the above understanding and applying above provisions in the present case, in our view, legal services received by the Company (who would qualify as a ‘business entity’) should not be liable to Service tax since Company’s turnover was less than INR 10 Lakhs in the preceding financial year. Also, since the services are exempt, the question of payment of Service tax under partial reverse charge mechanism by the Company should not arise.

Answer:

Advocates can provide services either as individual or as firms.

Legal services provided by Advocates or partnership firms are exempt from service tax when provided to the followings:

to an advocate or partnership firm of advocates providing legal service (same class of persons)

to any person other than a business entity

to business entity with turnover upto Rs. 10L in the preceding FY.

However in respect of services provided to business entities with  a turnover exceeding Rs. 10L in the preceding FY, Tax is required to be paid on RCM basis by the business entity.

So in your case, turnover of the business entity is not exceeding Rs. 10L in the preceding FY, TAX on RCM basis is not payable by the business entity.

The term “Business entity” is defined u/s 65B of the Finance Act, 1994, as any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession.

Thus the term “Business entity” also includes sole proprietors as well.

The provisions relating to arbitral tribunal are also on the similar lines.

The author is a practising CA and is registered Insolvency Professional. He can be reached at cavinodchaurasia@gmail.com, Mob. +91 9953587496.