For period prior to 01/09/2009
The services provided by any advocates are exempt from the levy of service tax.
In 2009 the Union Budget introduced service tax for advocates & legal services on receipts basis with effect from 01/09/2009 to 31/03/2012.
Govt impose service tax on services provided or to be provided to any business entity, in relation to advice, consultancy or assistance in any branch of law excluding appearance before any court, tribunal or authority and the term ‘business entity’ has been defined to include association of persons, body of individuals, company or firm but does not include an individual.
Provisions of services were applicable on receipts basis.
For period 01/04/2012 to 30/06/2012
The services provided by individual advocates are taxable on accrual basis / billing basis.
The central government as per vide notification 30/2012 dated 20th June, 2012 made liability of service receiver to pay service tax instead of service provider.
Entry (iv) of notification No. 30/2012 reads as under:-
Taxable service provided or agreed to be provided by,-
(A) an arbitral tribunal, or
(B) an individual advocate or a firm of advocates by way of legal (OLD- support) services to any business entity located in taxable territory.
For period 01/07/2012 to 31/03/2016
Then Central Government has exempted many of the services from the levy of Service Tax vide Notification no. 25/2012 – Service Tax dated 20th June, 2012 with effect from 01/07/2012. This notification has undergone various amendments vide various notification.
Entry 6 of notification 25/2012 reads as under:-
Services provided by –
(a) an arbitral tribunal to –
(i) any person other than a business entity; or
(ii) a business entity with a turnover up to rupees ten lakh in the preceding financial year;
(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 advocate 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;
The combined reading of both the notification reveals that some services provided by arbitral tribunal is exempt and legal service provided by advocates to specified persons are exempt and if the services provided by advocates are not exempt then the service tax is to be paid by service receiver instead of service provider.
For period 01/04/2016 & onwards
Honourable Finance Minister Mr. Arun Jaitley in Union Budget of 2016-17, 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 services provided by senior advocates to their clients on forward basis (i.e. service tax has to be paid by senior advocates instead of clients)
1. Generally service tax is payable by the provider of Service. For eg:- When service is provided by a management consultants to its client then in this case service provider i.e management consultant is liable to pay Service tax on its output service and comply with other statutory provisions such as filing of return, etc.
As per Section 68(1) of the Finance Act, 1994 provides for payment of service tax by service providers. However, section 68(2) empowers the Central Govt. to notify any services in Official Gazette and the service tax thereon shall be paid by such person as may be specified.
2. In exercise of power conferred under section 68(1) the central government has issued notification 30/2012 dated 20th June, 2012 which came into effect from 1st July, 2012. The notification makes liability of service receiver to pay service tax instead of service provider. Reverse charge mechanism in service tax has been introduced with effect from 01/07/2012. With its introduction, service receiver (the client) is liable to pay service tax on the same to the government and provide details of such services in his return. Service provided by advocates was covered in this notification as discussed above.
3. From 01/04/2016 onwards, the amendment is that legal service provided by senior advocate 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.
For E.g. If Advocates has rendered services and charged bill of Rs. 1,00,000. Service tax liability is Rs. 1,00,000*14.5% = Rs. 14,500/-
So, As per notification no. 30/2012 dated 20/06/2012, any legal services provided or agreed to be provided by individual advocate or a firm of advocates other than senior advocate by way of legal services and arbitral tribunal, the service tax has to be discharged by the service receiver i.e. business entity on 100% Value of service under reverse charge mechanism.
In other word, the service tax on liability on legal service is in the hand of service receiver (100%), if provided by individual advocate or a firm of advocate other than senior advocate and in the hand of service provider, if provided by senior advocate
4. From 01/04/2016 onwards, exemption has been withdrawn in the following services, i.e.-
– Services provided by a senior advocate to an advocate or partnership firm of advocates;
– Services provided by a senior advocate as a person represented on an arbitral tribunal to an arbitral tribunal, and
– Services provided by a senior advocate to a person ordinarily carrying out any activity relating to industry, commerce or any other business or profession having turnover of upto 10 lakh in preceding financial year
Service tax in the above instances would be levied under forward charge. Hence service provider (i.e. Senior Advocate) shall be liable to service tax.
However, the existing dispensation regarding legal services provided by a firm of advocates or an advocate other than senior advocate is being continued.
Point of Taxation :-
a) Rule 4A of Service Tax Rules, 1994: As per the said Rule, a provider of taxable services is required to raise the invoice not later than 30 days of completion of taxable service or receipt of any payment of such taxable service, whichever is earlier.
b) Rule 2A of the POT Rules: Date of Payment:
For the purposes of these rules, “date of payment” shall be the earlier of the dates on which the payment is entered in the books of accounts or is credited to the bank account of the person liable to pay tax. Provided that
(A) the date of payment shall be the date of credit in the bank account when –
(i) there is a change in effective rate of tax or when a service is taxed for the first time during the period between such entry in books of accounts and its credit in the bank account; and
(ii) the credit in the bank account is after 4 working days from the date when there is change in effective rate of tax or a service is taxed for the first time; and
(iii) the payment is made by way of an instrument which is credited to a bank account,
(B) if any rule requires determination of the time or date of payment received, the expression “date of payment” shall be construed to mean such date on which the payment is received
c) Rule 4 of the POT Rules: Determination of Point of Taxation in case of change of effective rate of tax:
d) Rule 5 of the POT Rules: Payment of Tax in case of new services: Where a service is taxed for the first time, then,-
Meaning of Important words:-
a) Senior Advocate define u/s 16 of the advocates Act, 1961 as :—
(1) There shall be two classes of advocates, namely, senior advocates and other advocates.
(2) An advocate may, with his consent, be designated as senior advocate if the Supreme Court or a High Court is of opinion that by virtue of his ability standing at the Bar or special knowledge or experience in law] he is deserving of such distinction.
(3) Senior advocates shall, in the matter of their practice, be subject to such restrictions as the Bar Council of India may, in the interest of the legal profession, prescribe.
(4) An advocate of the Supreme Court who was a senior advocate of that Court immediately before the appointed day shall, for the purposes of this section, be deemed to be a senior advocate: Provided that where any such senior advocate makes an application before the 31st December, 1965 to the Bar Council maintaining the roll in which his name has been entered that he does not desire to continue as a senior advocate, the Bar Council may grant the application and the roll shall be altered accordingly.
b) Business entity: (Definition in section 65B (17) of financial act, 1994.
Business entity means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. In short, if any service is provided for personal use of individual ,it is not taxable. Likewise charitable organisation is not covered under business entity if it does only charitable activity and no business.
c) Legal service : As per Notification No. 25/2012-Service Tax, Dated – 20th June, 2012 “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.
Now, ‘senior advocates’ are liable to pay service tax as service providers since payment of service tax by a service receiver under reverse charge mechanism is no longer applicable. On the other hand, legal service provided by a firm of advocates or an advocate (other than senior advocate) is continued to be taxable under reverse charge mechanism.
For Example, If senior Advocates provide service of `1,50,000/- to business entity for Legal services then services tax on above service is Rs. 1,50,000*14.5% = ` 21,750/- will be paid by service receiver and no Reverse Charge Mechanism will be applicable Hence, Senior Advocates can utilize their Cenvat Credit on input services.
Actions to be taken by Senior Advocates
There are two aspects in this amendment:-
1. Service provided by senior advocates which were exempt under notification 26/2012 dated 20th June, 2012 and now taxable under forward charge, the services are:-
a. Service provided by senior advocate to :-
i. an advocate or partnership firm of advocates providing legal services
ii. a business entity with a turnover up to rupees ten lakh in the preceding financial year
2. Service provided by senior advocate which were not exempt but chargeable under reverse charge mechanism and now taxable under forward charge, the service is service provided by senior advocate to a business entity with a turnover of more than rupees ten lakh in the preceding financial year
Both the above aspects are now covered under forward charge mechanism (i.e. service tax has to be charged by senior advocate).
Action to be taken in case service provided fall in aspect 1:-
1. Recoveries to be made for all the invoices raised prior to 01/04/2016 by end of 31/03/2016 and the same needs to be deposited and to be cleared in bank accounts within next 4 working days.
2. In any case, if the recoveries are not made prior to 01/04/2016 or the amount is not credited to the bank account within prescribed period then service tax @ 14.5% will also be applicable on such payments. You may raise separate supplementary invoice to recover such service tax to the client
Action to be taken for services provided falls in aspect 2:-
1. For services provided under aspect 1, there is change in effective rate of tax, because before 1st April, 2016 they were exempt and after 1st April , 2016 they are taxable.
2. As per rule 4 of Point of Taxation rule, 2004, when there is change in rate of tax then if two of the following three things are executed before change in rate of tax, then old rate of tax will be applicable otherwise new rate of tax will be applicable:-
a. Date of invoice
b. Date of payment
c. Date of providing service
So, if any two of the above three things are executed before 1st April, 2016 then the service shall be exempt, otherwise 14.5% of service tax will be applicable.
In tribute to My Nana ji (Late Adv S.N. Mishra, Sambhar Lake)