Service tax on Legal Consultancy, more clarification needed

THE focus of this write up is restricted to `Legal Consultancy Service’ which is one of the new services brought into the service tax net in Budget 2009 and the scope of this new levy. This levy is introduced by way of insertion of clause (zzzzm) in sub section 105 of section 65 of the Finance Act, 1994 which reads as follows:

“(zzzzm) to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner:

Provided that any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.

Explanation.—For the purposes of this sub-clause, “business entity” includes an association of persons, body of individuals, company or firm, but does not include an individual;”

While in one of the articles by a learned Netizen, the scope and meaning of the word `authority’ used in the proviso to clause (zzzzm) was analyzed and a doubt was expressed as to whether appearance before Settlement Commission is excluded from the purview of this levy or not. A fair question indeed. But there is another aspect that needs to be sorted out before the Ministry notifies this new levy.

This levy is applicable for any taxable service provided to a business entity in relation to advice, consultancy or assistance in any branch of law, in any manner by any other business entity. The `Explanation’ given there under defines a business entity to include an `association of persons, body of individuals, company or firm but does not include an individual.

JS TRU eagerly explains the introduction of this new levy as follows:

Legal Consultancy Service: As in the case of management consultancy or engineering consultancy service, any consultancy, advice or technical assistance provided in any discipline of law is proposed to be subjected to service tax. However, the tax would be limited to services provided by a business entity to another business entity. It has been defined that a business entity includes firms, associates, enterprises, companies etc. but does not include an individual. Thus, services provided by an individual advocate either to an individual or even to a business entity would be outside the scope of the taxable service. Similarly, the services provided by a corporate legal firm to an individual would also be outside the purview of taxable service. Any service of appearance before any court of law or any statutory authority would also be kept outside this levy.

But are the words & phrases `association of persons’, `body of individuals’, `company’, `firm’ and `individual’ properly defined under Chapters V of the Finance Act, 1994? While every attempt is made to define every word or phrase under Section 65 of the Finance Act, 1994, the words & phrases `association of persons’, `body of individuals’, `company’, `firm’ and `individual’ to whom this new levy is made applicable are not properly defined under Chapter V of Finance Act, 1994. Only `body corporate’ and `associated enterprise’ are defined therein.

However, the overzealous TRU goes overboard and uses the word `advocate’ and `corporate legal firm’ whereas the proposed clause (zzzzm) does not provide for any reference to the word `advocate’ or `corporate legal firm’ in the said clause that is sought to be introduced through this Finance Bill. Even the phrase `Legal Consultancy Service’ is liberally used by the TRU in its DO letter and explanatory notes on service tax without adequate explanation for its usage.

After all, the levy is on any business entity for service in relation to advice, consultancy or technical assistance in any branch of law, in any manner to any other business entity. Where is it mentioned in this newly introduced provision that only advocates or corporate legal firms are liable for service tax?

When advice, consultancy or technical assistance in any branch of law, in any manner is subject to levy of service tax, what is required for the service provider is the knowledge of that branch of law. Further when there is no specific restriction on service providers to provide a specific service in this clause, usage of such words like advocate or corporate legal firm will only complicate matters, because any individual in association with another individual who is conversant with any branch of law can provide the said service in any manner by forming a partnership.

For e.g. if two individuals (who are not advocates) form a partnership firm and provide services related to patent law or undertake tax compliance work of corporate clients, they are also liable to service tax under this new levy subject to the exclusion provided therein.

Further, Section 65 (121) of the Finance Act, 1994 states that words and expressions used but not defined in this Chapter (i.e. Chapter V of Finance Act, 1994) and defined in the Central Excise Act, 1944 or the rules made there under shall apply, so far as may be, in relation to service tax as they apply in relation to a duty of excise.

A cursory glance at the provisions of Central Excise Act, 1944 or the rules made there under indicates that these words and phrases are nowhere defined under that statute or the rules made there under. They do not even find a mention in the General Clauses Act, 1897, though they are defined under Section 2(31) of the Income Tax Act, 1961. Unfortunately, the provisions of Income Tax Act, 1961 are not made applicable to Finance Act, 1994 or even Central Excise Act, 1944.

Therefore, before the CBEC/Ministry tries to enforce this levy, these phrases should be adequately defined under Chapters V and VA of the Finance Act, 1994 otherwise the authorities down below can look forward to rough.

Advocates Fell its Unfair

Advocates said that legal profession was meant to help the needy and there were occasions when advocates gave counsel and contested cases free of cost in the larger interest of the society. They asked what the government was doing for advocates and what facilities were being provided to them? If answer was no then the government had no right to take service tax from advocates.

One advocate, opined that advocates were not businessmen. They were not involved in any trade. There was no fixed fee for any legal work therefore, how could the government impose service tax on advocates. The government should make clear how advocates come under the ambit of service tax.

Some Avocates commented that there was no fixed fee for any legal work. Every advocate had different counsel fee for same work. And the truth is that majority of advocates are unable to earn enough to meet the needs of their family. Under these conditions imposition of service tax had no justification.

Advocates in high court and supreme court earn handsomely so they could be levied with service tax. But, advocates practising at district and tehsil level should be exempted from tax they said.

Ganesh Dixit, president of Kanpur Bar Association opined that before imposing service tax, the government should fix the counsel fee. Kanpur Bar Association would oppose the taxation move strongly. Indeevar Bajpai, general secretary, KBA said majority of the advocates were not in the income tax net. Only those advocates had to pay service tax who would come under the tax net and their income would be in higher slab. Therefore, advocates should not fear service tax. However, he also said that he would talk with the Bar Council of UP and All India Bar Council and apprise them about the apprehension of Kanpur advocates and urge them to lodge their protest at all India level.