Reverse Charge Mechanism (RCM) on Legal Services under GST (GST on Advocate or Firm of Advocates)

[Tushar Malik]

Introduction

Under the Goods and Services Tax (GST) framework, legal services provided by advocates and law firms are subject to the Reverse Charge Mechanism (RCM). This means that the recipient of the service, if a business entity, is liable to pay GST instead of the supplier of the service. This article explains the key provisions related to RCM on legal services as per the relevant GST notifications.

The RCM mechanism for legal services under GST ensures tax compliance by shifting the GST liability from service providers (advocates/law firms) to business entities receiving such services. Proper classification of legal services and awareness of exemption provisions are crucial for businesses and legal professionals to ensure compliance with GST laws.

Legal Framework for RCM on Legal Services

RCM Notification [N/N 13/2017-CT(R)]- Legal Services by Individual Advocate or Firm of Advocates

Category of Supply of Services: RCM applies to the following services:

• Legal services provided by an individual advocate, including a senior advocate, by way of representational services before any court, tribunal, or authority, directly or indirectly, to any business entity in the taxable territory.
• Legal services provided by a firm of advocates to a business entity in the taxable territory.

Supplier of Service: An individual advocate, including a senior advocate or a firm of advocates.

Recipient of Service: Any business entity located in the taxable territory.

Key Terminologies

1. Senior Advocate

• Definition:
  • A Senior Advocate is an advocate designated by the Supreme Court or a High Court under Section 16 of the Advocates Act, 1961.
  • The designation is granted based on the advocate's ability, standing at the Bar, and special knowledge or experience in law.
  • Senior Advocates are subject to specific restrictions in their practice, as prescribed by the Bar Council of India.

2. Legal Service

• Definition:
  • "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."

3. Advocate

• Reference: Section 2(a) read with Section 2(k) of the Advocates Act, 1961
• Definition:
  • An advocate means an individual entered in the roll of advocates maintained under the Advocates Act, 1961.

Discussion on Taxability of Legal Services under GST

1. Taxability

Legal services provided by an advocate constitute a taxable supply under GST.

2. Scope of RCM on Legal Services

RCM applies to legal services provided by:

• An individual advocate or a firm of advocates to a business entity.
• However, if an advocate or a law firm provides non-legal services such as accounting services or filing of tax returns, such services will not be covered under RCM and will be subject to Forward Charge Mechanism (FCM). This interpretation is based on our understanding. However, other professionals may have a different opinion, as some argue that these services fall under the category of "assistance in any branch of law."

3. RCM on Legal Services

RCM applies only when legal services are supplied to a business entity located in India. If services are provided to a non-business entity, RCM is not applicable, and the service may be exempt from GST.

Exemption Notification [N/N 12/2017-CT(R)]

Entry No. 45 (b): Services by an Individual Advocate or a Firm of Advocates

Legal services provided by an individual advocate (other than a senior advocate) or a firm of advocates to the following recipients are exempt from GST:

1. Another advocate or partnership firm of advocates.
2. Any person other than a business entity.
3. A business entity with an Annual Turnover (ATO) in the preceding financial year below the threshold for GST registration.
4. The Central Government, State Government, Union Territory, Local Authority, Governmental Authority, or Government Entity.

Entry No. 45 (c): Services by a Senior Advocate

Legal services provided by a senior advocate to the following recipients are exempt from GST:

1. Any person other than a business entity.
2. A business entity with an ATO below the GST registration threshold.
3. The Central Government, State Government, Union Territory, Local Authority, Governmental Authority, or Government Entity.

Note: If a senior advocate provides services to another advocate or advocate firm, GST is not exempt if the ATO exceeds the exemption threshold, and GST becomes payable.

RCM Application on Legal Services

• Under RCM, the litigant/applicant/petitioner is deemed the recipient of the service.
• The business entity receiving legal services shall be liable to pay GST under RCM.

Summary

1. Advocate Firm & Individual Advocate (Other than Senior Advocate)
   • To Non-Business Entity → GST Exempt
   • To Business Entity
     • Government Authority / Govt Entity → GST Exempt
     • Other Business Entities
       • ATO (PY) within exemption limit → GST Exempt
       • ATO (PY) exceeding exemption limit → GST Payable (RCM by recipient)
2. Senior Advocate
   • Supply to another Advocate/Advocate Firm → GST Payable if ATO exceeds exemption limit.