LEGAL CONSULTANCY SERVICES

NARESH K. SHETH, CA

 

Preamble:

Service tax on legal services has become operative w.e.f. 01.09.2009.  Various questions relating to service tax and compliance thereof are being raised by professional brothers from legal fraternity.  Compilation of such questions alongwith replies and views thereon is done hereunder.  An attempt is made here to explain the relevant provisions of Finance Act, 1994 dealing with “Legal Consultancy Services“ in a reader freindly manner i.e. question answer format.  For the sake of brevity and simplicity, the legal provisions and judicial prounouncements are not dealt with in this article.  I hope this approach will find favour of the readers. 

 

Legal Consultancy Services - Frequently Asked Questions

Q1.     Whether legal services are liable to service tax?

Ans:   Legal services are liable to service tax w.e.f. 01.09.2009.  It was not liable to service tax till 31.08.2009.

Q2.      Under which statute legal services is liable to service tax?

Ans:    It is liable to service tax under section 66 read with section 65(105)(zzzzm) of the Finance Act, 1994.

Q3               Under which legislation government is empowered to levy and collect service tax?

Ans:          Service tax is levied and collected by central government under residuary entry 97 of the list 1 to the VII schedule to the constitution.     

 

Q4.      Date from which legal services are liable to service tax?

Ans:            Legal services are liable to service tax w.e.f. 01.09.2009. Effective date is notified vide Notification No. 26/2009-Service Tax dated 19.08.2009.

Q5.      Is it a tax on the profession as lawyer or advocate?

Ans:    It is not a tax on a profession of lawyer or advocate.  Unlike chartered accountants, the persons is not subjected to tax merely he is holding educational qualification as advocate / lawyer and is practicing as member of the Bar Council.

Q6.      If it is not a tax on profession of lawyer / advocate, it is tax on what?

Ans:    It is a tax on services rendered by any business entity in relation to advice, consultancy or technical assistance in any branch of law. 

Q7.      What is meant by the term “business entity”?

Ans:            Business entity includes an association of persons, body of individuals, company or firm.  It does not include individual.  

Q8.      Does it mean that individual legal practitioners are out of service tax net?

Ans:    Yes.  Individual legal practitioners are not liable to service tax. 

Q9.             Whether an individual carrying on legal practice in sole proprietary concern having full fledge set up and having advocates / lawyers on its pay roll is a business entity liable to service tax?

Ans:            Proprietary concern is only a trade name.  It is not an independent legal entity.  Proprietary concern is not a body of individuals, association of persons, firm or company.  A view, therefore, can be taken that proprietary concern is not a business entity and is not liable to service tax.

Q10.          Whether business entity having non-qualified members and rendering legal consultancy services is liable to service tax?

Ans:            There is no pre-requisite that the members of the business entity should be professionally qualified or a member of Bar Association to make such business entity a taxable entity.  Even business entity having non-qualified members will be liable to service tax if it renders legal consultancy services.

 

Q11.   Please explain above referred proposition with example.

Ans:            Firms acting as income tax consultants, sales tax consultants, P.F. consultants, ESIC consultants, labour law consultants etc will also be liable to service tax even if its partners are not qualified as advocates or lawyers.

Q12               Whether all advocates, solicitors or legal consultants are liable to service tax?

Ans:   No.  Advocates, solicitors or legal consultants practicing in an individual capacity are not liable to service tax irrespective of their professional fees receipts.

Q13     Who is precisely liable to service tax under “Legal Consultancy Service” category?

Ans:  Company, firms, association of persons or body of individuals rendering legal consultancy services are liable to service tax.

Q14    Is there any threshold limit for applicability of service tax?

Ans:    Small service providers are exempted for first aggregate realization (including other taxable services) of Rs.10,00,000/- for financial year provided gross taxable services rendered in preceding financial year were below Rs.10,00,000/-.

Q15    Which are the legal services not liable to service tax?

Ans:               Following legal services are not liable to service tax:

·        Appearance before any court, tribunal or authority.

·        Services provided to individuals by any business entity (firm, company, association of persons or body of individuals).

Q16              Appearance before the court, tribunal or any other authority is not taxable.  One has to perform incidental services such as compilation of written submissions, drafting of replies, conferences with clients etc which are incidental to above referred appearance / representation.  Whether such incidental services are liable to service tax?

Ans:               Answer to above question will depend on the facts of each case.  If incidental service is charged separately, it may be liable to service tax.  In case of composite assignment where incidental services are not charged separately, a view can be taken that it is a preparatory work for making effective and proper representation and it is incidental to the appearance / representation assignment.   In such a case it partake character of appearance / representation services not liable to tax.  One has to apply the test of predominance in case of composite assignment.  If appearance / representation before authority is predominant and drafting etc is incidental, it may not be taxable.  Where drafting / other services are predominant and representation / appearance is incidental, the said services will be taxable.

Q17            Whether all services rendered by legal consultants is liable to service tax?

Ans:            Except for services listed in answer to question 15, all services rendered by legal consultants to non-individuals are taxable.

Q18     Who is an assessee under service tax legislation?

Ans:           Service provider providing legal consultancy services is an assessee under service tax legislation.

Q19     Who is liable to pay / bear service tax?

Ans:          Legal position / implications are summarized as under:

·        Service tax is a service provider’s obligation.

·        If contract permits, service tax can be passed on to the client by separately charging it in bill or invoice.

·        If contract does not permit, service tax is to be borne by service provider.

·        Service provider is liable to pay tax whether or not recovered from client.

·        Where service provider doesn’t charge service tax separately, bill amount is supposed to be inclusive of service tax.

·        Authorities have recourse to service provider for tax recovery.

·        Authorities do not have recourse to service recipient for tax recovery.

Q20             Whether legal consultants are required to be registered with service tax department?

Ans:    Yes. Advocates, solicitors, legal consultants who are liable to pay service tax is required to get themselves registered within 30 days from the date on which they become liable to pay service tax.

Q21.    What are the consequences of delayed registration?

Ans:             Penalty of higher of following amounts is leviable:

·         Rs.5,000/-.

·        Rs.200/- per day of delay.

 

Q22.            Please clarify when the charge of service tax is created?

Ans:            Provision of the service is a subject matter of the tax. The service tax liability accrues on rendering of legal services.  The rendition of the services is a taxable event.

Q23.    What is the taxable event in case of legal services?

Ans:             Taxable event occurs on earlier of:

·        Provision / rendition of taxable services.

·        Receipt of advance for taxable services to be provided. 

Q24.    What is the relevance of taxable event and effective date?

Ans:               Service provided / rendered prior to effective date is not taxable. 

Q25.  Please explain above referred proposition with specific reference to legal services.

Ans:   Legal services provided / rendered on or before 31.08.2009 are not taxable.

          It will not be taxable even if:

·        Bills or invoice for such services are made on or after 01.09.2009.

·        Professional fees for such services are realized on or after 01.09.2009.

 

However in order to avoid probable dispute about the date of rendering of the services, it is advisable to complete the billing of all services rendered up to 31.08.2009 in the month of August 2009 itself.

Q26.    What amount will be liable to service tax?

Ans:            Gross amount charged to the client for services rendered will be liable to service tax.  

Q27.          Whether out of pocket expenses billed to client is liable to service tax?

Ans:            Reimbursement of expenses incurred as “pure agent” of client is not liable to service tax.  All other reimbursement will form part of gross amount charged to clients and is liable to service tax.

 

Q28.    Can you give some examples of expenses which can be treated as having incurred as “pure agent” of client?

Ans:            Reimbursement of court fees, stamp paper expenses, stamp duty and other statutory charges paid on behalf of clients can be treated as having incurred as “pure agent” and same may not be liable to service tax.

Q29.            Whether free services or honorary services are liable to service tax?

Ans:    No.  Free / honorary services are not liable to service tax. 

Q30     What is the rate of service tax?

Ans:   Present rate of service tax is 10%. In addition, there is a levy of 2% Education Cess and 1% Higher Education Cess on service tax amount.   Present effective tax rate is as under:

Particulars

Tax Rate

Service Tax

10.00%

Education Cess 2% of Service Tax

0.20%

Higher Education Cess 1% of Service Tax

0.10%

Total Effective Rate

10.30%

 

Q31            Whether service provider is entitled to get any credit / set off of the input service tax paid by it?

Ans:   Service provider is entitled to get credit / set off of the service tax paid on input services availed by it for providing taxable services. In other words, service provider paying service tax on office rents, telephone bills, courier charges, professional fees payments, audit fees etc is allowed to set off against tax liability.  Even excise duty paid on capital equipments and materials used for providing taxable services can be claimed as set off from service tax payable by the service provider. However, the above benefits are subject to the provisions of and compliance with procedures laid down in Cenvat Credit Rules, 2004.

Q32            Whether service provider is liable to pay service tax to government immediately on billing to its client?

Ans:    No.

 

Q33             When service tax become payable?

   Ans:   Service tax is payable on receipt of consideration for taxable service rendered. In other words, service tax is payable on realization basis except for services rendered to associated enterprise.

Q34.            Whether consideration received in kind is taxable?

Ans:    Yes.  It is taxable.  One has to value such services as per Service Tax (Determination of Value) Rules, 2006.   

Q35    What are the due dates for payment of service tax?

Ans:    

Entity

Periodicity

Due Date of Payment

Firm

Quarterly

April to June

July to September

October to December

January to March

5th July

5th October

5th January

31st March

Other entities

Monthly

All months except for March.

For the month of March

5th of Next Month

 

31st March

       

 

Q36     What are the consequences for delayed payment of service tax?

Ans:   

Interest

13% p.a. for the delayed period

Penalty

Rs. 200 per day or 2% of the tax for every month of delay whichever is higher subject to maximum of service tax amount. 

 

Q37               Whether service provider is required to file any return?

Ans:    Service provider is required to file half yearly returns.

 

 

Q38     What is the periodicity of filing the returns and due dates thereof?

Ans:    

Half year ending on 30th September

25th October following the relevant half year.

Half year ending on 31st March

25th April following the relevant half year.

 

 

Q39    What are the consequences of delayed filing of the returns?

Ans:    Late filing fees - minimum of Rs.500 and maximum of Rs.2000

 

Q40    What is the penalty for willful non payment of service tax?

Ans:   Penalty of an amount equal to 100% or 200% of the amount of service tax sought to be evaded can be levied on service provider.

 

Conclusion:

Most of the professions were covered under the service tax levy from last many years.  Keeping legal consultancy services out of service tax net was a matter of debate among the professionals and nation as a whole.  There was no sound / convincing reason for excluding the legal services from service tax levy.  Honorable finance minister has taken a bold step to remove this anomaly and discretion by bringing legal services into service tax net.  However one feels that exclusion of individual practitioners, appearance services and services rendered to individuals will limit its coverage.  It is still discriminatory vis-ŕ-vis other professionals where services rendered by individuals and services rendered to individuals are taxable.