Despite vehement protests by the legal fraternity, service-tax on legal consultancy services has become a reality of life w.e.f 1.5.2011. The author, an eminent expert in service-tax law, has prepared this Guide to assist lawyers in complying with their newly-imposed service-tax obligation. A pdf copy of the Guide (revised) is available for download
Service tax was first introduced on Legal Consultancy Service from 01.09.2009 by the Finance (No. 2) Act, 2009 by inserting cl. (zzzzm) in S. 65 (105) of the Finance Act, 1994. The coverage of taxable service was limited to service provided by a business entity to any other business entity. Further, the taxable service was restricted to advise, consultancy or technical assistance in any branch of law, in any manner, but not appearance before any court, tribunal or an authority. Thus, service provided by an individual to any person and service received by the individual from any person was not liable to tax.
The Finance Act, 2011 (enacted on 8th April, 2011) has substantially increased the scope of the levy which is explained in this article. This amendment comes into force from 01.05.2011.
Amendments by the Finance Act, 2011 :
The levy of service tax from “legal Consultancy Service” is given hereinbelow in question – answer form for easy understanding and better comprehension:
Q.1. Please explain the amendment in the taxable service of legal consultancy by the Finance Act, 2011.
A.1. The Finance Act, 2011 has substituted sub-clause (zzzzm). The definition read as follows :
“(i) (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 service before any cout, tribunal or authority;
(iii) to any business entity, by an arbitral tribunal, in respect of arbitration”
The scope of Legal Consultancy Service can be derived from above definition as follows :
The taxable service include advise, consultancy or assistance in any branch of law by a business entity to any person.
Further, service provided to a business entity by any person in relation to representation before any court, tribunal or authority is also included.
Furthermore, service provided to a business entity by an arbitral tribunal in respect of arbitration is also included. The word “arbitration” and “arbitral tribunal” shall have the meaning assigned to them in the Arbitration and Conciliation Act, 1996.
Q.2. Please explain the extent of the service tax law.
A.2. The service tax is introduced by the Finance Act, 1994. It extends to whole of India except the state of Jammu & Kashmir. That means service provided by a person from Jammu & Kashmir is not liable to tax.
Q.3. Please explain the meaning of business entity.
A.3. The meaning of business entity is contained in S. 65(19b) which provides that, “business entity” includes an Association of Persons, Body of Individuals, Company or Firm, but not include an individual.
It is a mute question whether an individual carrying business in proprietary firm is regarded as business entity or not. The definition includes a firm but does not include an individual. In the opinion of the writer, applying the principle of noscitur a sociis, the word, “firm” takes meaning of the words, “association of person”, “body of individuals” and “company” which signifies that a proprietary concern may not be regarded as business entity.
Q.4. Please explain whether individual lawyers are covered in service tax? If yes, how?
A.4. Individual lawyers are covered if they provide representation service to a business entity before any court, tribunal or authority.
Q.5. Are the individual lawyers covered if they provide advise, consultancy or assistance in any branch of law?
Q.6. A business entity providing advise, consultancy or assistance in any branch of law to an individual is covered ?
Q.7. Is an individual lawyer providing advise, consultancy etc or representation service to an individual, covered?
A.7. No, service by an individual lawyer to another individual person is not covered.
Q.8. It seems that the definition does not specify that the person providing Legal Consultancy Service should be an advocate or a lawyer, holding a legal degree. Does it mean that a firm of income tax practitioners or sales tax practitioners not having any member holding a legal degree and providing advise, consultancy is covered under service tax?
A.8. Yes, such firms with or without persons holding legal degree are also covered under the levy.
Q.9. It happens in practice that the solicitors having proprietary firms appoint individual counsels to argue the case on behalf of its client which is a business entity in a court of law, whether such counsels are required to charge service tax to the solicitors?
A.9. On a plain reading of the definition it appears that service provided by an individual to an individual is outside the ambit of the levy. However, the counsel holding brief of the solicitor also holds authority to appear on behalf of the actual client. The client is bound by the representation made by the counsel. In such a case, it can be said that the counsel is providing taxable service to the client who is a business entity.
Q.10. In the situation stated in Q.9, Please explain the manner of raising bill by the counsel.
A.10. The counsel should raise bill on the solicitor stating in the bill “on account of _______” and the solicitor either reimburse the amount from the Escrow A/c of the client or make the client pay directly to the counsel.
Q.11. The solicitor in Q.9, also provide service of preparing a case, briefing the counsel and other advisory and consultancy to the business entity. He may include the counsel’s bill in his charge and the client pays the total amount to the solicitor from which he pays to the counsel. What will be the liability of the solicitor?
A.11. The solicitor would be liable to pay service tax on the entire amount received from the client which includes counsel’s bill including service tax in it. The solicitor will get credit of payment of service tax to the counsel under Cenvat Credit Rules and pay balance amount to the Government.
The solicitor may opt for reimbursing the amount to the counsel and issue separate bill for his fees. In that case, the counsel would be required to pay service tax on his bill and the solicitor would pay service tax on his fees separately.
Q.12. Will the position be different in case of Advocate on Record and the advocate appearing in the court?
A.12. When the business entity appoints some person as Advocate on Record who in turn appoint an advocate to represent the matter before a court, the same principles in above examples will apply.
Q.13. A firm of Chartered Accountant appoints an individual advocate to represent his client who is an individual in the tribunal. Whether the advocate would be liable for service tax?
A.13. Upto 24.04.2011, the practicing chartered accountants, cost accountants, company secretaries, were exempt from service tax in relation to representation before any statutory authority in the course of proceedings initiated under any law, for the time being in force, by way of issue of a notice . The chartered accountants etc. are now covered even in case of representation services to an individual. However, from the discussion mentioned above, it can be said that the advocate in fact provide service to an individual and not to the chartered accountant firm. Therefore, an individual advocate may be regarded as providing representation service to an individual and outside the scope of the service.
Q.14. Please explain whether initial exemption of `10 Lakhs (threshold limit) is available to this service? If yes, how the exemption works.
A.14. The threshold limit is provided under the Service Tax Law for small service providers. In this context, exemption of `10 Lakhs of taxable service is available (under notification no. 8/2008 – ST dated 01.03.2008) to any service provider including the Legal Consultancy Service provider. Conditions for such exemption are as follows :
- The exemption is based on the aggregate value of taxable service provided in the previous financial year. For the purpose of the service being introduced first time as a taxable service in the Statute Book, the value of taxable service in the previous year would be regarded as nil. The service provider would be eligible for the exemption upto the first receipt of `10 Lakhs towards the taxable service provided.
- The exemption is optional which means a taxable service provider may or may not opt for this exemption. If the exemption is not opted, he would be required to pay service tax from the first bill raised after the service become taxable.
- The person opting for exemption would not be entitled to claim Cenvat credit of inputs, input service and capital goods until he start paying service tax.
- A service provider providing service from different places will have to aggregate the value of taxable service from all the places he is providing taxable service for the purpose of exemption.
- A service provider providing other taxable services will have to include the turnover of receipt of all taxable services for the purpose of the exemption.
- The basic exemption scheme being optional, the option once exercised is final and cannot be revoked in the concerned financial year.
- The exemption is conditional upon taxable service provided in the previous financial year upto the basic limit. However, it is to be claimed on the receipt of taxable service in the current year which means a taxable service provided in the previous year, but the value received in the current year is counted twice for the purpose of basic exemption.
Q.15. If the service provider has exceeded threshold exempted value of taxable service provided, say in the F.Y. 2011-12, whether he can avail for exemption in F.Y. 2012-13?
A.15. No, the exemption is based on the provision of taxable service in the previous financial year and hence only if the taxable value of service provided in the previous financial year does not exceed the basic exemption limit, he is eligible for the exemption again in the immediately following year.
Q.16. Can you explain the provisions regarding registration under service tax?
A.16. A person providing taxable service and opting for basic exemption should apply for registration within 30 days of crossing the limit of receipt of value of taxable service of `9 Lakhs. The person not opting for exemption should obtain registration within 30 days from providing from the date of issue of first invoice. In case of new service, the person providing such service should obtain registration within 30 days from issue of first invoice, if he has not opted for the basic exemption.
Q.17. Please explain the procedure for registration.
A.17. The procedure for applying for registration is now online :
- To login on www.aces.gov.in and obtain user name and password with email id for communication.
- Fill in Form ST-1 with complete details on the website of www.aces.gov.in. A PAN based ST Code Number would be generated.
- The following documents should be attached for submission to the Jurisdictional Officer :
- Application in Form ST-1 in triplicate duly signed.
- Attested copy of PAN card.
- Proof of address of the premises which is required to be registered.
- Copy of document governing the Constitution of organization (e.g. partnership deed in case of partnership firm).
- Authority Letter in favour of the person who is to collect the registration certificate on letter head of organization applying for registration.
- Power of Attorney in case the documents are signed by an authorized representative.
- Declaration Form.
Q.18. Whether registration certificate is available online? If yes, whether it is required to be signed by the Jurisdictional Superintendent? In which form the registration certificate is issued?
A.18. The registration certificate can be obtained online after submission of above details to the Jurisdicitonal Superintendent and it is valid. There is no requirement to get the certificate signed by the Jurisdictional Superintendent. The registration certificate is in Form ST-2.
Q.19. Please explain the challan by which service tax is required to be paid.
A.19. GAR 7 is the challan by which service tax is required to be paid.
Q.20. Please state the date on which payment of service tax is required to be made?
A.20. In case of individual and partnership firms, the service tax payment is to be made on quarterly basis of a calendar year i.e. 5th day of the succeeding month of the end of the quarter. For example for the period April to June, service tax is to be paid on 5th July. However, in case of quarter ending March, the payment is required to be made on 31st March only. In case of the service provider whose payment of service tax exceed `10 Lakh in the previous financial year, he is required to make payment electronically by 6th day instead of 5th day of the succeeding month.
Q.21. Whether service tax is to be paid on receipt of payment of the taxable service provided or on issue of bills?
A.21. Prior to introduction of Point of Taxation Rules by the Finance Bill, 2011 the service tax was required to be paid only on receipt basis. However, the Point of Taxation Rules were first introduced by the Finance Bill, 2011 which required service tax to be paid on date of the provision of service or the issue of invoice (it should be within 14 days of provision of such service) or receipt of advance, whichever earlier.
These Point of Taxation rules were amended before passing of the bill by the Parliament to provide that Service tax is to be paid in case of the persons providing as proprietor or partnership firm in the field of Legal Consultancy Service, Practicing Chartered Accountants’, Practicing Cost Accountants’, Practicing Company Secretary, Architect Service, Interior Decorators’ Service and Scientist or Technocrat on receipt of payment (including receipt of advance for service to be provided).
Q.22. Please explain the value on which service tax is required to be paid.
A.22. S. 67 of the Finance Act, 1994 provides that service tax is required to be paid on gross amount charged by the service provider for such service provided or to be provided. The gross amount charged for the taxable service includes any amount received towards the taxable service, before, during or after provision of such service.
In case of free service, no service tax is chargeable. However, in case whether provision of service is for a consideration which is not ascertainable, the amount will be determined as per the Service Tax (Valuation) Rules, 2006.
Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged (i.e. to be computed on the reverse formula basis, as if the tax is included in the gross amount received).
In case of service to Associated Enterprise (to be determined as per S. 92A of the Income Tax Act) any book adjustment by which the amount is debited or credited, as the case may be, to any account, whether called “Suspense Account” or by any other name, in the books of account of service provider (i.e. on accrual basis).
Service tax is also payable on reimbursement of expense such as travelling, boarding and lodging, conveyance etc, incurred during the course of providing service. Certain exclusions are provided in Service Tax (Valuation) Rules, 2006 in relation to expenses incurred as “pure agent”. This exclusion interalia relates to expense incurred during the course of providing service, subject to eight conditions prescribed therein which have to be satisfied simultaneously. Some of these conditions are that recipient of service should receive and use such services procured by the service provider, authority to service provider to make the payment on his behalf and reimbursement of actual amount incurred.
Q.23. An advocate provides service to a Non-resident. Whether he will be liable to pay tax, if the payment is received in Convertible Foreign Exchange?
A.23. The Legal Consultancy Service falls in recipient base criteria. If the person who receive this service is located outside India at the time of rendering the service, the advocate would be entitled for the benefit of export of service as per the Export of Service Rules, 2006 if the payment is received in Convertible Foreign Exchange. The Point of Taxation Rules have now provided that such person would be liable to pay tax if the payment is not realized in Convertible Foreign Exchange within the time specified by the Reserve Bank of India.
Q.24. Please explain the provisions as regards to filing of service tax returns.
A.24. Half yearly service tax returns are to be filed in form ST-3 within 25 days from the end of half year of a calendar year, i.e. by 25th October for the half year ending April to September and 25th of April for half year ending October to March.
Q.25. What are the records required to be maintained?
A.25. The following records are required to be maintained by a service provider under Rule 4A of Service Tax Rules, 1994 :
- No specific records are prescribed under the rules. The records maintained by the service provider in accordance with other laws are acceptable. They may be manual or computerized. However, it is required that the service provider should furnish a list of the records maintained with the first return.
- Every person providing taxable service is required to issue an invoice/bill/challan signed by such person or a person authorized by him. Such invoice/bill/challan shall be serially numbered and contain the following details :
- Name, Address & Registration Number of Service Provider.
- Name & Address of Service Receiver.
- Description, Classification and Value of Taxable Service
- Service Tax Payable
- Non-maintenance of proper records and non-issue of invoice after completion of service within 14 days may entail the penalty of `10,000/. Also the concealment penalty of 100% of tax payable is applicable if the invoices are not issued within 14 days or it is not entered into the books of account (from the notified date upon enactment of Finance Act, 2011).
Q.26. What is the rate of interest on late payment of service tax?
A.26. 18% per annum, from the date of enactment of Finance Act, 2011 based on number of days of delay. Prior to this, the rate of interest was 13% per annum. The rate of interest is reduced to 15% in case of small service providers, whose turnover of taxable service does not exceed `60 lakhs in the financial year covered by Show Cause Notice or the last financial year.
Q.27. Whether Cenvat credit can be availed by the service provider?
A.27. Yes, in accordance with the amended Cenvat Credit Rules, 2004. From 01.04.2011, Cenvat credit can be availed on input service, inputs or capital goods anytime on or after receipt of invoice/bill or challan by the service provider. Such invoice etc. should be in conformity of the requirement of Rule 4A of Service Tax Rules, 1994 as discussed above. If the service provider fails to make payment within 90 days of the date of the invoice, he will be required to pay service tax equivalent to the Cenvat credit availed alongwith the interest.
Q.28. Please explain availment of Cenvat credit in case of Legal Consultancy Service.
A.28. Availment and utilization of Cenvat credit is governed by Cenvat Credit Rules, 2004. These rules are amended substantially from 01.04.2011 . An output service provider is eligible to avail the credit of following duties or taxes paid for the purpose of providing output taxable service.
- Excise duty on inputs
- Service Tax on input services (such as, i) service tax paid to another Legal Service Provider or a chartered accountant, etc. which may be regarded as identified input service against taxable output service, ii) common services like telephone, chartered accountants etc)
- Excise Duty on capital goods like air-conditioner, computers etc
A Legal Consultancy Service provider who provides only taxable services, will be entitled to avail full credit of tax or duty paid as stated above. However, if such service provider also provides non-taxable service like representation service to an individual, he will be entitled only proportionate credit of common services in the ratio of taxable service provided to all taxable and non-taxable service. However, such service provider will be eligible to avail full credit of input service availed directly for providing taxable output service (like another Legal Service Provider). The credit may be taken as stated in answer to Q.27.
Further, once the credit availed, it can be utilized any time for the purpose of payment of service tax. No time limit is prescribed for availment or utilization of Cenvat credit.
Q.29. Please explain the penalty, prosecution or other garnishing provisions.
A.29. Yes, the penalties are as follows :
- Late fees for delay in filing of returns (S. 70 r.w. Rule 7C) –
`500/- for first 15 days
`1,000/- for 16 to 30 days
`100/- per day beyond 30 days, maximum upto `20,000/-
- Penalty for delay in payment of tax (S. 76) –
1% per month or `100/- per day, whichever is higher, maximum penalty upto 50% of the tax demanded
- General Penalty (S. 77) –
`10,000/- for any contravention of any provision of the Act or Rules for which no penalty is prescribed
- Penalty for suppression of value of taxable service (S. 78) –
100% of tax evaded or short paid ;
50% of tax, if true and complete details of transactions are captured in specified records or 25% of tax, if the tax alongwith interest is paid within 30 days from the date of communication of the order (the period of 30 days extended to 90 days in case of small service providers whose value of taxable service does not exist `60 lakhs during during the financial year covered by the Show Cause Notice or during the last preceeding financial year).
- If penalty u/s. 78 is imposable, no penalty u/s. 76 would be levied
- Waiver of penalty u/s. 78 is available in specified circumstance, in case where the assessee has captured true and complete details of transactions in specified records subject to establishing reasonable cause for failure to make payment of service tax.
- Other garnishing provisions are made applicable as regards to power to search premises, first charge on the property of defaulters (subject to some other charges) and prosecution for offences.
Author: CA Rajkamal Shah