1. INTRODUCTION
Within the GST regime, services provided by the advocates and Law firms registered as partnership firms to any business entity are to be charged with GST under the reverse charge basis, and the services provided by the advocates to other advocates or law firms having themselves registered as a partnership firm are not chargeable to GST. The intricate system under which Goods and Services Tax (GST) is applied on the services offered by advocates, senior advocates and law firms that include Limited Liability Partnerships (LLPs), is discussed herewith, along with the most recent government notifications/interpretations and ongoing compliance. The introduction of GST on 1 July 2017 brought a lot of uncertainty on how legal services will be treated, how law firms of the LLPs (those who are eligible to apply) will be registered, and the exemption options of various categories of legal practitioners.
2. BACKGROUND
Under the erstwhile service tax regime, it accorded legality to the sector with certain exemptions, giving some clarity to the practitioners. Advocates’ Services provided by the law firms, even when they are Limited Liability Partnerships (LLPs), were exempted vide Notification No. 25/2012-ST. The reverse charge mechanism was applied to services given by the advocates to the business entities vide Notification No. 30/2012-ST, and more importantly, Rule 2 (1) (cd) of the Service Tax Rules, 2004, defines explicitly the Partnership Firm, which covers LLP as well. The shift of GST, however, brought about a great turmoil to this established set-up, as a result, confusion prevailed and was mixed with legal issues that would later need to be put to rest by a judge, followed by government clarifications.
The GST introduction and several notifications created new ambiguity in the legal services sector. Notification No. 13/2017-Central Tax (Rate) dated 28 June 2017, introduced the reverse charge mechanism to legal services into the GST regime but initially limited it and operationalized it as applicable only on so called representational services and not to legal services but used the phrase firm of advocates without defining whether it would also include LLPs. At the same time, Notification No. 12/2017-Central Tax (Rate) issued exemptions to legal services specifying the expression as a partnership firm of advocates, which left room for the exemption of LLPs. The lack of any equivalent to Rule 2(1) also had the effect of the confusion being further compounded by the fact that the CGST law also contains a Section 2(84) which introduces the concepts of Firm and LLP as distinct persons, in addition to not having any equivalent of Rule 2(1)(cd) of the Service Tax Rules in the CGST Act. Besides this, the Notification No. 5/2017-Central Tax exempted persons only involved in making supplies that attract reverse charge in the aspects of registration, except what is to be done by LLPs; hence, the confusion that thus perplexed the practitioners further with the complexity.
3. CLARIFICATIONS
Discrimination and lack of transparency on the status of LLPs resulted from the statutory ambiguities and wording of GST notifications, which gave rise to numerous writ petitions brought before the Delhi High Court. Delhi High Court in the capacity of the Hon’ble Court in the landmark case of J.K. Mittal & Co. v. Union of India [2017] 83 taxmann.com 281, specifically recognized that there was no clarity as to whether all the type of legal services rendered by legal practitioners and legal firms would fall under the reverse charge notification. The Court was aware that when and provided that all legal services are subject to a reverse charge mechanism, it does not impose any compulsory obligation on any legal practitioner or law firm to become registered under the GST Acts. In a set of directions, the Court gave interim relief of utmost importance by stipulating that no coercive action could be undertaken against advocates, law firms including LLPs, on non-compliance with the requirements of GST, that all legal services shall be taxed as it has been and shall be in force under the reverse charge mechanism till providers felt a need to claim input tax credit and that no legal service provider who has voluntarily registered since 1 July 2017, shall be deprived, by the present orders, of the reliefs they are. In its subsequent order dated 14 September 2017, the Court also instructed the Central Government to clarify this issue by a corrigendum in Notification No. 13/2017 to the effect that the reverse charge mechanism applied not only to the representational services but also to all legal services provided by advocates and law firms, including LLPs.
After the judicial guidelines and confusion prevailed, the government took some corrective steps to overcome the uncertainties in the GST system regarding legal services. A Press Release issued on 15 July 2017, tried to explain the stand on GST applicability on legal services, that there was no change in the previous regime and that representational services given by an advocate or legal services were in the cut and reverse charge mechanism. However, the press release kept on these non-specific words, such as those of an advocate and a firm of advocates, without dealing directly with the issue of LLP. More to the point, the Government had modified Notification 12/2017-Central Tax (Rate) on 22 August 2017; by incorporating Explanation 3 that expressly clarified that a Limited Liability Partnership, formed and registered under the Limited Liability Partnership Act, 2008, would henceforth also be treated as a partnership firm or a firm with regards to availing benefits of GST exemptions. At the same time, Notification No. 13/2017-Central Tax (Rate) was amended with the aim at making the reverse charge mechanism go beyond simply representational services to cover the entire legal services with a detailed definition of what constitutes the legal service that is that… the legal service means any service provided about advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.
4. PRESENT GST FRAMEWORK
In the present GST regime, the provision of law-service providers has explained the registration aspect, as spelt out in the amended laws and court judgments. GST registration shall be done in case there is an aggregate of Rs. 20 lakhs in the previous financial year, inter-state supply of the taxable service, or voluntary registration in case of seeking input tax credit benefits of an advocate, senior advocate, or a firm of advocates. On the contrary, registration exemption can be given in those cases where services are fully subject to the reverse charge method, supplies are directed to recipients of exempt suppliers only, or the turnover is less than the specified limit. The reverse charge system is used when legal services are given to business persons whose turnover is above Rs. 20 lakhs and the service is not provided directly or indirectly through other advocates, but there will not be a charging of GST; rather, the recipient of the service will pay GST. Using this framework eliminates the over-burdening of small businesses and individual clients with the process of GST implementation, but keeps the tax net on bigger commercial dealings.
4.1 Beneficiary Categories
The GST exemption structure of legal services has been modelled in such a way that smaller practitioners are shielded against erosion of their income, and the provision of legal services is accessible to a variety of different types of clients. The services offered by individual advocates or firms of advocates are not taxable to fellow individual advocates or firms of advocates, senior advocates, or business entities exempt from registration, as well as government or non-business entities. The exemption is minor in the case of senior advocates; it only occurs when the services are offered to business organisations with turnovers of up to Rs. 20 lakhs, government organisations, and non-business organisations. It is a differential treatment that acknowledges senior advocates’ widely known fee structure and commercial business practice. At the same time, it ensures that access to senior legal counsel is kept open to smaller interests and non-commercial undertakings in general. The exemption regime, therefore, satisfies both the necessity of adherence to tax and the basic tenet of access to justice for people who belong to various economic beasts in society.
4.2. Exportation of Legal Services
The GST treatment of legal services offered by foreign clients raises some special considerations vastly different from those of providing services to the local clientele. By supplying the services to foreign clients, Indian legal practitioners are not subject to reverse charge because these services will be considered export of services and zero-rated supplies under the GST system. However, this treatment provides the requisite mandatory compliance since the exporting under the second option shall amount to inter-state supply under the IGST Act and thus be subject to the IGST under Section 5 of the IGST Act, 2017. This means that the lawyers offering their services to foreign clients must be registered with GST to abide by interstate discharges. However, the domestic turnover is less than the GST threshold. The critical aspect of this registration is that input tax credit and refunds can be claimed on the exports service as provided in Section 16 of the IGST Act of 2017 but on this burden falls under compliance as registration under GST requires attention to the detail of creating reports regularly mounting returns and keeping in mind besides the export documentation relative requirements.
4.3. The Limited Liability Partnerships
First, the language being deployed by different GST notifications, the differential language, left doubt about whether LLPs would be treated equally to the traditional partnership firms. This could leave some discriminatory effects against the constitutional tenets of equal treatment. It was contended in the legal challenge based on writ petitions that the government plan was to benefit the individual lawyers and law firms formed as partnership structures, and hence that LLPs and partnership firms of the advocates should be offered no discrimination. The Government conclusively addressed this matter under corrective measures notified by Explanation 3 to Notification 12/2017, explaining that LLPs registered under the Limited Liability Partnership Act, 2008, will be deemed partnership firms under GST. This clarification means that LLP law firms enjoy the same exemptions, reverse charges, and exemption from registration as traditional partnership firms.
| Legal Service Provider | Recipient | GST Applicability | Liability to pay |
| Individual Advocate | GST-Registered business | 18% (RCM) | Business |
| Individual Advocate | Unregistered individual | Exempt | NA |
| Law Firm | GST-Registered business | 18% (RCM) | Business |
| Law Firm | Unregistered individual | Exempt | NA |
| Senior Advocate | Law Firm or Advocate | 18% (FCM) | Advocate |
| Senior Advocate | GST-Registered business | 18% (RCM) | Business |
5. ODISHA HIGH COURT RECENT JUDGMENT
The recent pronouncements of the court have also given importance to ensuring that the practising lawyers are not harassed unnecessarily by the tax authorities when implementing the GST provisions in the case of Devi Prasad Tripathy vs. In Principal Commissioner CGST and Central Excise, Bhubaneswar and Others vs Orissa, it was questioned and objected that tax authorities are taking such inappropriate measures of issuing notices to practising advocates to show documentary evidence to support their claim of being a practising advocate to be exempted from tax liability. The Court noted that one should not harass the practising advocates by issuing notices asking them to pay the service tax or GST when that requirement does not bind them, and they are not required to show their status as practising advocates using documents. Later, the court struck off the broadcasts of service tax of Rs. 2,14,600 and penalty of Rs. 2,34,600 together with interest, imposing that income earned through legal services is one of the exemptions, as the petitioner, who is a practising lawyer, is exempted from levying service tax. The Court gave straightforward directions to the Commissioner and the Department that no intimation requiring payment of GST or service tax can be issued to the lawyers to the extent they come under the exempted set and thereby offered essential safeguards against the excesses of on rails administration.
6. CONCLUSION
Since the introduction of the GST legal services regime in July 2017, the latter has evolved dramatically into a reasonably straightforward guide on most areas of compliance. The early problems of weakly framed notifications, prejudicial treatment of LLPs adopted by the government and other distinctions in treatment of LLPs with partnerships have been overcome to a large extent by the court interventions especially the case interventions made by the Delhi High Court in the case of J.K. Mittal & Co. v. Union of India, and the subsequent clarifications given by the government that reduced LLPs to the category of Partnership firms. The current stand means that LLPs are in the same standing as the partnership firms regarding GST, and the reverse charge is still the mainstream way taxes are raised on the business-to-business legal services. Though complexities in the framework mandate the legal practice to be cautious regarding compliance matters, especially the compliance issue in export services, inter-state supplies and the difference between exempt and non-exempt service categories.
Author Bio
In my case, I am a practising Advocate and paying my office rent alongwith GST to my landlord. But as Advocates, we are not registered under GST and hence I am not able to adjust GST from other sources. So we are the losers of GST completely. Your article is very nice but you can please include this aspect also in the interest of legal fraternity.