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.