prpri Advocates Vs. GST | GST on Legal Services in India Advocates Vs. Goods And Services Tax (GST) | GST on Legal Services in India

I would like to submit that I had various meeting with various Advocates (Practice in Civil, Criminal and/or Tax), but all they are confused to understand whether they are covered under any exemption notification or they will have to pay the tax liability under Forward Charge Mechanism (‘FCM’) or Reverse Charge Mechanism (‘RCM’). Even, they also confused whether they will have to obtain registration under GST under mandatory provisions.

It is to be noted that in practice of Advocacy filed, it is common that Advocates provides different kind of services to their clients. They provide consultancy or advice or drafting work to/for their client in any matter. They also represent their clients before any court, tribunal or authority in India. Moreover, it is also seen that they play crucial role as an arbitrator or mediator to arrive in settlement of the dispute between with other opposing party.

Now, the basic question which comes into the mind whether any kind of services provided by the Advocates to their clients is taxable? or only selective services are taxable under GST Law?

I understand that the answer of the above question is not so easy to give at a glance. The taxability of legal services under GST is much complicated. This is complicated since there are taxable legal services as well as exempted services and its taxability as FCM or RCM and also at the same time the services are classified into different classes/categories.

In view of the above, I understand that we should discuss in details about the taxability of services provided by the Advocates to their clients.

First, we are going to discuss about the Legal Services provided by the Advocates to their Clients. So, we should understand the term defined as Legal Services under GST Law.

1. Legal Services under GST Law.

Legal Service has been defined by the Government through their Notification. As per Para 2(zm) of Notification No.12/2017 – Central Tax (Rate) dated 28th June, 2017

“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;”

By the above definition, it is needless to say that Legal Service would include rendering legal opinion, advice, consultancy, technical assistance in legal matter and appearance before court, tribunal and various judicial and quasi-judicial authorities for and on behalf of the clients.

Further, we can categories the Legal Service into two different categories one as ‘Representational Service’ and others (i.e. ‘Non-representational Services’ or service other than Representational Service)

It is also pertinent to mention that by go through the above definition, it is clear that it hardly any matter to provide the legal service (Representational as well as Non-representational) by Advocates or other Professionals like Chartered Accountant or Company Secretary. Means, Legal Service can be provided by Advocates or other Professionals to their clients. But taxability will depend whether it is exempted or taxable or taxable under FCM or RCM.

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After clarity of Legal Service, the next question which comes into our mind, is that whether legal services are taxable under the GST Laws or not.

2. Taxability of Legal Services under the GST Law.

If any service is covered under the definition of supply and is not exempted, it will be taxable under GST law. It is clear that ‘Legal Services’ are covered under the definition of supply under Section 7 of CGST Act, 2017.

But whether it will be taxable under FCM or RCM depends on the notifications issue by the Government in this regard. Please note that Section 9 of the CGST Act, 2017 empowers the Government to issue notification to covers Services or Goods or both under RCM (where tax is to be paid by recipient).

It is pertinent to note that the Government has used its power mentioned in Section 9 of the CGST Act, 2017 by issued a Notification No.13/2017 – Central Tax (Rate) dated 28th June, 2017 to bring Advocate Services under RCM.

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Before going ahead, we should check about any exemption issued by the Government in reference to ‘Legal Services’. In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (‘CGST’), the Central Government, the Government has issued a Notification No. 12/2017 – Central Tax (Rate) dated 28th June, 2017 regarding exemption of various services. Entry No. 45 of the said Exemption Notification is concerned with exemption to ‘Legal Service’.

Under the said exemption notification ‘Legal Services’ are categorised in two different categories- one ‘Senior Advocates’ and second one for ‘Advocates other than Senior Advocates’. Therefore, it becomes necessary to know about the terms Senior Advocates and Advocates other than Senior Advocates.

3.1 Who is an Advocate and Senior Advocate?

Senior Advocates: As per Para 2(zzd) of Notification No.12/2017 – Central Tax (Rate) dated 28th June, 2017,

“Senior Advocate” has the same meaning as is assigned to it in section 16 of the Advocates Act, 1961.”

Section 16 of the Advocates Act, 1961 provides that Senior Advocate means-

“an advocate, may with his consent, be designated as senior advocate if Supreme Court or a High Court is of the opinion that by virtue of his ability standing at Bar or special knowledge or experience in law and he is deserving of such distinction.”

So, we can say that ‘Senior Advocate’ means an advocate who may be designated as senior advocate by the Supreme Court or by any High Court in the country. From time to time the Supreme Court or the High Courts would designate certain lawyers satisfying the above conditions as senior advocates.

Advocates (other than Senior Advocates): As per Para 2(b) of Notification No.12/2017 – Central Tax (Rate) dated 28th June, 2017,

“Advocate” has the same meaning as is assigned to it in clause (a) of sub-section (1) of section 2 of the Advocates Act, 1961.

Section 2((1)(a) of the Advocates Act, 1961 provides that

Advocate” means an advocate entered in any roll under the provisions of this Act.

“Roll” means a roll of advocates prepared and maintained under this Act. [Section 2 (k) of Advocates Act,1961]

Please note that Advocate on Roll in India means advocate whose name is entered in register of advocate prepared by Bar Councils. In case of Foreign lawyers, they are not to be treated as an advocate in India as they are not on roll of advocates of any bar councils in India.

3.2 Is there any difference between Advocate and Lawyer?

By the above, we can say that Advocates are those ‘Law Graduate Persons’ who are registered in Bar Council of India or in the Bar Council of any State. They can represent a client in the court of law, speak on behalf of a client, plead their case, etc.

Therefore, ‘Law Graduate Persons’ who is not registered in Bar Council of India or in the Bar Council of any State, may be called simply as Lawyers. To become Advocate, it is essential for the person to put his name in roll of advocates prepared and maintained under the Advocates, Act 1961.

It is pertinent to note that Lawyers can give legal advice but are not eligible to stand in court of law on behalf of their clients. Both these categories are differently treated under the GST law.

3.3 Exempted Legal Services.

In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (‘CGST’), the Central Government, the Government has issued a Notification No.12/2017 – Central Tax (Rate) dated 28th June, 2017 regarding exemption of various services. Entry No. 45 of the said Exemption Notification is concerned with exemption to ‘Legal Service’. Under Entry No. 45 of the said notification services provided by-

A. Senior Advocate by way of legal services

i) to any person other than business entity; or

ii) to a business entity with an aggregate turnover up to ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year.

B. A firm of Advocates or an individual Advocate other than a Senior Advocate, by way of legal services

i) to an advocate or firm of advocates; or

ii) to any other person other than business entity; or

iii) to a business entity with an aggregate turnover up to ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year.

Note:

i) It is to be noted that, it hardly makes a difference whether the Business Entity is registered or unregistered in the preceding year under the provisions of the GST.

ii) Legal Services provided by Senior Advocates to Advocate Firms or to Advocates seems taxable under the GST law from the wordings of the Notification. However, we should wait for any clarification from the Department in this regard.

Exemption to Arbitration Services: Exemption is provided to Arbitration Services also, if it is provided by arbitrator

– to any person other than business entity; or

– to business entity with an aggregate turnover up to ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year.

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After going through the above, it is clear that ‘Legal Services’ other than exempted legal services are taxable under the GST Law. Under the GST Law, services (except special categories) are taxable @ 18%, but not directly on the hands of the Advocates but under RCM Mechanism as per the RCM Notification issued by the Government.

As we are aware that the Central Government has empowered under Section 9 of the CGST Act, 2017 to issue notification to covers Services or Goods or both, where tax is to be paid by recipient under RCM. Therefore, in exercise of the powers conferred by sub-section (3) of section 9 of the CGST Act, 2017.

The Government has issued a Notification No. 13/2017 – Central Tax (Rate) dated 28th June, 2017 regarding list of services under RCM. Entry No. 2 of the said RCM Notification is concerned with ‘Legal Service’.

Entry No. 2 of Notification No. 13/2017 – Central Tax (Rate) dated 28th June, 2017

Sl. No. Category of Supply of Services Supplier of service Recipient of Service
2 Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity. An individual advocate including a senior advocate or firm of advocates. Any business entity located in the taxable territory.

By the wording of Entry No. 2, it seems that only representational services are covered under RCM. However, later on the same has been clarified by Circular No. 27/01/2018-GST dated 04.01.2018– Reverse Charge.

Question/Clarification sought- Whether legal service other than representational services provided by an individual advocate or a senior advocate to a business entity are liable for GST under reverse charge mechanism?

Clarification: Yes. In case of legal services including representational services provided by an advocate including a senior advocate to a business entity, GST is required to be paid by the recipient of the service under reverse charge mechanism, i.e., the business entity.

4.1 Taxable Legal Services?

After analysis of the above and by considering exemption notification, we can say that the following ‘Legal Services’ provided by Advocates, Senior Advocates or firm of Advocates are taxable-

A. *Legal Service provided by Senior Advocate to a Business Entity with an aggregate turnover exceeds ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year.

B. Legal Services provided by Senior Advocates to Advocate Firms or Advocates (still a clarification is pending but taxable).

C. Legal Service provided by a Firm of Advocates or an individual Advocate other than a senior advocate to a Business Entity with an aggregate turnover exceeds ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year.

D. There are instances where, advocates engage foreign advocates to serve their client located abroad against which foreign advocate issued bills to Indian advocates / advocate firms. In such cases, it is important to note that services supplied by foreign advocate cannot enjoy exemption of Notification No.12/2017 – Central Tax (Rate) dated 28th June, 2017 in the hand of the foreign advocate due to the reason that the foreign advocate is not on the ‘Roll’ of bar council of India (thus not qualified as an “ advocate” as defined in the Advocate Act/GST law) and hence their supplies are taxable under reverse charge mechanism in the hands of service receiver (advocates who engaged foreign advocates).

*We have already discussed herein above Legal Services includes ‘Representational Services’ and Non –Representational Services’.

It is very pertinent to note that the above four are the Legal Services under the Reverse Charge Mechanism (RCM), as envisaged in Sections 2(98) and 9(3) of the Central Goods & Service Tax Act, 2017 and Entry No. 2 of Notification No.13/2017 – Central Tax (Rate) dated 28th June, 2017.

However, there is other one situation which is not covered under RCM. Please note that as per Notification No.13/2017 – Central Tax (Rate) dated 28th June, 2017 the RCM is applicable only in case of services provided by an individual advocate, senior advocate or firm by way of ‘Representational Services’ before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory.

Therefore, ‘Non –Representational Services’ provided by Senior Advocates to (other) Senior Advocates, individual Advocates or to Advocate Firms under FCM.

Arbitration Services: Regarding Arbitration Services also, if it is provided by arbitrator to business entity with an aggregate turnover above ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year, it become taxable but on otherwise exempted. Here also the Business Entity being the recipient of arbitral service needs to pay tax under RCM.

4.2 Different situation wherein Legal Services are taxable under Reverse Charge Mechanism and Forward Charge Mechanism.

Service Provider Nature of Service Service Receiver Taxability & respective notification Remarks
Senior Advocate Representational Services

 

 

Senior Advocate YES

[RCM vide Notification No. 13/2017]

Where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity.

(GST under RCM to be paid by business entity)

Individual Advocate YES

[RCM vide Notification No. 13/2017]

Firm of Advocates YES

[RCM vide Notification No. 13/2017]

Business Entity >20 lakh YES

[RCM vide Notification No. 13/2017]

Business Entity <=20 lakh NO

[Exempt vide Notification No. 12/2017]

Non-business Entity NO

[Exempt vide Notification No. 12/2017]

Senior Advocate Other than Representational Services

 

 

Senior Advocate YES

[FCM vide Notification No. 13/2017]

As Notification No. 13/2017 specify about only representational services, therefore, service other than representational services will fall under the Forward Charge Mechanism (FCM)
Individual Advocate YES

[FCM vide Notification No. 13/2017]

Firm of Advocates YES

[FCM vide Notification No. 13/2017]

Business Entity >20 lakh YES

[*RCM vide Circular No. 27/01/2018-GST dated 04.01.2018– Reverse Charge]

Business Entity <=20 lakh NO

[Exempt vide Notification No. 12/2017]

Non-business Entity NO

[Exempt vide Notification No. 12/2017]

Firm of Advocates or individual advocates Legal Services

(Legal services cover both representational or non-representational)

Senior Advocate NO

[Exempt vide Notification No. 12/2017]

Individual Advocate NO

[Exempt vide Notification No. 12/2017]

Firm of Advocates NO

[Exempt vide Notification No. 12/2017]

Business Entity >20 lakh YES

[*RCM vide Circular No. 27/01/2018-GST dated 04.01.2018– Reverse Charge]

Business Entity <=20 lakh NO

[Exempt vide Notification No. 12/2017]

Non-business Entity NO

[Exempt vide Notification No. 12/2017]

Important Finding: Legal Services when provided by any one (i.e. Advocates, Senior Advocates or firm of Advocates) to a business entity having turnover exceeding ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year is not exempt. Even though it is under RCM but not in any case exempt.

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Advocates are also confused whether they will have to obtain registration under GST under mandatory provisions. For this, we should first see the legal provisions in this regard.

5.1 Legal provisions for Registration:

1. A person engaged in supply of services having turnover exceeding ₹ 20 lakh shall be mandatorily required to take registration. [Section 22 of CGST Act, 2017]

2. A person engaged exclusively in supplying services wholly exempt from tax is not required to obtain registration. [Section 23(1) of CGST Act, 2017]

3. A person engaged in supplying of services where entire tax is payable under RCM is not required to obtain registration. [Notification No. 5/2017 – Central Tax dated 19th June, 2017]

4. A person engaged in supplying inter-state services is mandatorily required to obtain registration without turnover limit [Section 24 of CGST Act, 2017]. However, vide Notification No. 10/2017–Integrated Tax, dated 13.10.2017, if aggregate value of supplies in inter-state services is up to ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year, registration is not required.

Please note that Export of Services is considered as inter-state transactions; therefore Section 24 of CGST Act will be applicable.

Findings:

1. If Advocates are engaged in supply of exempt services only, then there is no need to obtain registration under GST.

2. If Advocates are engaged, wholly, in supply of services where entire tax is payable under RCM, then there is no need to obtain registration under GST.

3. If Advocates are engaged in supply of services (whether Inter-State or Intra-State) and aggregate value of supplies of services is more than ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year, then they are mandatorily required to take registration.

Please note that if Advocate engaged in supply of services less than Rs. ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year and having any other income by which aggregate turnover exceed ₹ 20 lakh then it is required to take registration in GST. It is pertinent to note that for calculation of ₹ 20 lakh limit, all kind of supplies, taxable, interstate, exempt, export, RCM output, Nil rated to be clubbed.

Example: an advocate (residing in a normal category state) having rental income at ₹ 16 lakh from commercial property and having an income of ₹ 5 lakh from his legal services (total ₹ 21 lakh), then he is liable to take registration under the Central Goods & Service Tax Act and under the corresponding State Goods & Service Tax Act.

Another Example: an advocate (residing in a normal category state) having Interest Income in Saving Bank at ₹ 6 lakh and having an income of ₹ 15 lakh from his legal services (total ₹ 21 lakh), then he is liable to take registration under the Central Goods & Service Tax Act and under the corresponding State Goods & Service Tax Act, despite of that interest received from bank is exempt supply. The exempt supply is included while computing the aggregate turnover.

Note: J K Mittal & Company vs. Union of India (W.P .(C) 5709/2017 & CM No. 23814/2017), Delhi HC: Judgment of the case states that no coercive action can be taken against any ‘advocate’ or ‘firm of advocates’ till government clarify its stand in relation to taxability or issues relevant notifications exempting ‘advocate’/’firm of advocates’ from obtaining registration.

Further, in Transfer Petition(s)(Civil) No(s).2460-2462/2017, the Hon’ble Supreme Court has ordered on 22.01.2018 that there shall be stay of further proceedings in Writ Petition(C) No.5709 of 2017 and Writ Petition(C)No.6017 of 2017 pending before High Court of Delhi and Writ Petition(T)No.274 of 2017 pending Chhattisgarh.

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6.1 Position in case of Export of Legal Services.

As per Notification No.13/2017 – Central Tax (Rate) dated 28th June, 2017, RCM is applicable on legal services provided to Business Entity. In case services are provided outside India, then RCM is not applicable as the Business Entity is located outside taxable territory.

In case of legal services, services provided outside India qualifies as Export of Services provided all conditions are fulfilled. Hence, RCM is not applicable. Notification No. 5/2017 – Central Tax dated 19th June, 2017 will not be applicable, in full since the Export of Services are not under the ambit of RCM.

Export of Services is considered as inter-state transactions, therefore, Section 24 of CGST Act will be applicable and registration is mandatory. A person engaged in supplying inter-state services is mandatorily required to obtain registration without turnover limit [Section 24 of CGST Act, 2017]. However, vide Notification No. 10/2017–Integrated Tax, dated 13.10.2017, if aggregate value of supplies in inter-state services is up to ₹ 20 lakh (₹ 10 lakh in the case of special category States) in the preceding financial year, registration is not required.

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7.1 Taxability of Import of Legal Services.

There are instances where, Advocates engage Foreign Advocates to serve their client located abroad against which Foreign Advocate issued bills to Indian Advocates / Advocate Firms. In such cases, it is important to note that services supplied by Foreign Advocate cannot enjoy exemption of Notification No.12/2017 – Central Tax (Rate) dated 28th June, 2017 in the hand of the foreign advocate due to the reason that the Foreign Advocate is not on the ‘Roll’ of bar council of India (thus not qualified as an “ advocate” as defined in the Advocate Act/GST law) and hence their supplies are taxable under reverse charge mechanism in the hands of service receiver (advocates who engaged Foreign Advocates)

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8.1 Position regarding Input Tax Credit.

Input Tax credit cannot be availed in case of Legal services provided in India as the output supplies are taxable at recipient end under RCM.

As per Section 16 of IGST Act, 2017, exports are zero-rated supplies and Input Tax credit can be availed in relation to export of services. Such Input Tax would be refunded to the taxpayer.

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9.1 Taxability on reimbursement of expenses charged by Advocates.

It is pertinent to note that taxability of reimbursement of expenses depends on nature of expenses incurred for provision of services by Advocates. If these kinds of expenses are in nature of ‘Pure Agent’ than there is no need to pay tax.

Example: – Normally, Advocates paid legal fees to Government on behalf of their client and charge the same from their client on actuals basis, in this case GST not to be paid by client being the all conditions of Pure Agent is fulfilled. However, in case of expenses other than nature of Pure Agent, GST is to be paid.

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10.1 SAC Code for Legal Services.

SAC Service
998211 Legal advisory and representation services concerning criminal law.
998212 Legal advisory and representational services concerning other fields of law.
998213 Legal documentation and certification services concerning patents, copyrights & other intellectual property rights.
998214 Legal documentation and certification services concerning other documents.
998215 Arbitration and conciliation services
998216 Other legal services

Important Points:

1. Legal Corporate Entities: The above exemptions on legal service are available to the advocates, senior advocates, law firms and to Limited Liability Partnerships (LLP) only. However, the firms like legal corporate entities are not eligible for the aforementioned exemptions but their services will be treated as other services taxable under the GST law.

2. Other Services: Services other than ‘legal services’ provided by Advocates, Senior advocates and Advocate Firms are taxable as per normal provisions of GST.

3. Legal Services by Lawyers: Legal services provided by Lawyers (law degree holders but not advocates on the rolls of any Bar Council) are taxable as per normal provisions of GST.

4. Legal Services by a Chartered Accountant/Company Secretary: A Chartered Accountant/Company Secretary providing legal advice in relation to commercial laws though covered by definition of legal services but not considered under any reverse charge mechanism (RCM) provisions or exemption provisions.

5. Export of Legal Services: It is suggested that, regarding legal services provided outside India, (export of services) advocates must follow statutory procedures for export services as laid down in the CGST Act/Rules to avail Integrated Goods & Service Tax credit on inward services, if any, and also to avoid any dispute in future.

6. Invoice under RCM: Advocates / Advocate firms (who have liability to tax) must mention on bottom of their invoice that tax is to be paid by service receiver under RCM.

References: –

Notification No.12/2017 – Central Tax (Rate) dated 28th June, 2017.

Notification No.13/2017 – Central Tax (Rate) dated 28th June, 2017.

Notification No. 5/2017 – Central Tax dated 19th June, 2017.

Circular No. 27/01/2018-GST dated 04th January, 2018– Reverse Charge.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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