Expansion of scope of Legal Consultancy Service

[Pradeep Jain]

CA Pradeep Jain and

Sukhvinder Kaur, LLB [FYIC]

The Legal Consultancy service was brought under Service Tax net from 01.09.2009. The Taxable service was defined under sub-clause (zzzzm) of clause (105) of Section 65 of the Finance Act, 1994. The Legal services provided to a business entity by any other business entity in relation to advice, consultancy or assistance in any branch of law were covered.

However, the services provided by way of appearance before any court, Tribunal or any authority and the services provided by the individuals were excluded.

Now, the Finance Minister has proposed in Finance Bill 2011 to expand the scope of legal consultancy services falling under the tax net.

     The sub-clause (zzzzm) has been proposed to be substituted in the following manner: 

(zzzzm) (i) to any person, by a business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner;

 (ii) to any business entity, by any person, in relation to representational services before any court, tribunal or authority;

(iii) to any business entity, by an arbitral tribunal, in respect of arbitration.

 Explanation – For the purposes of this item, the expressions “arbitration” and “arbitral tribunal” shall have the meanings respectively assigned to them in the Arbitration and Conciliation Act, 1996;’ 

Thus, the following services are included:

 (i)                  Services of advice, consultancy or assistance provided by a business entity to individuals are covered.

(ii)                Representational services provided by any person to a business entity; and

(iii)               Services provided by arbitrators to business entities.

The TRU letter dated 01.03.2011 clarified that Services provided by individuals to other individuals will remain outside the levy.

Now, under the Taxable Legal Consultancy services, the service provided by Business entity to another Business entity, Business entity to Individual and Individual to Business Entity are covered.

However, the Legal service provided by an Individual Lawyer provided to an individual will also get covered under the taxable service and service tax will become payable on all services.

Thus, the overall outcome of this levy will be that individual lawyers will covered under the service tax net. They have to pay the service tax on services provided to business entities. But the services provided to individuals will be exempt.

But earlier they were not covered under service tax and need not to take registration and pay tax. But now they will be covered. We have never seen a lawyer who is providing to individuals only. They provide services to both the individuals as well as to business entities. Hence, every individual lawyer will be covered. We have the debate about the fees of lawyers in recent past in the newspaper. So, threshold exemption of Rs. 10 Lakh will be meaningless for them.

This legal community feels that they should not be covered under service tax. If they are covered then the exemption is meaningless for them. They have to register, pay tax and file returns with the department. They have to follow the procedures of that department also. If this is to be done, they can do it for individuals also.

The second outcome of this levy will be on Chartered Accountants. Earlier the exemption was given to them on representation work on the ground that when lawyers are not paying tax on such activity then they should not be taxed. Hence the exemption under Notification no. 25/2006-ST, dated 13.07.2006 was given to them. But now the lawyers will plead that when the exemption is given to CAs then they should also be exempted otherwise their services will be costlier. They will not be able to compete with Chartered Accountants.

 The third outcome and most known outcome of this levy will be lawyers will go on strike and there will agitation against this levy. Let us wait and see the future.

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