The author is indignant at the proposal in the Finance Bill 2011 to levy service tax on lawyers. The practitioners of the noble profession are “Officers of Court” and not providers of a crass commercial service, argues the author. To levy the tax on “accrual” basis is deplorable and adds insult to injury claims the author pointing out that the proponents of the World’s second-oldest profession have been following the “receipt” system since time immemorial. The author implores Parliament to introspect carefully before giving sanction and warns that this ill-conceived provision stands a serious risk of being declared unconstitutional
When Service Tax was levied on Chartered Accountants, the levy of Service Tax on Chartered Accountants were challenged by the Federation in association with Bombay Chartered Accountant’s Society and The Chamber of Tax Consultants. The Apex Court up held the constitutional validity [All India Federation of tax Practitioners vs. UOI (2007) 293 ITR 406 (SC)] on the ground that the Chartered Accountants, Cost Accountants and Architects render service by giving advice on tax planning, auditing, costing, etc. which attracts value addition as in the case of manufacturer. The Court also observed that in the said petition there was no challenge to Article 268A and entry 92C of list 1 which was inserted by Constitution of India (Eighty-eighth Amendment) Act, 2003. Possibly, the All India Federation of Tax Practitioners along with other associations may have to once again knock the doors of the judiciary to challenge the levy of Service Tax on legal services including Article 268A of the Constitution of India.
When the legal practitioner is arguing the case before the Court or Tribunal he is considered as officer of Court and his duty is to assist the court to decide the case according to law. The professional fee of a legal practitioner cannot be equated with the commercial consideration
Any law framed by the legislature must be within the frame work of the Constitution of India. Law must be reasonable and if it is unreasonable it will be within the purview of judicial review. When the legal practitioner is arguing the case before the Court or Tribunal he is considered as officer of Court and his duty is to assist the court to decide the case according to law. The professional fee of a legal practitioner cannot be equated with the commercial consideration. There is violation of Article 14 by levying service tax on legal profession and not levying the Service Tax on other professionals rendering similar services. The Service tax is a value added tax which in turn is a general tax which applies to all commercial activities involving production of goods and provision of services, where as legal profession cannot be equated with commercial activity. The law cannot make the service provider to pay the tax, when service provider is accounting the income on cash basis and he may not recover the professional fees from the party concerned. Professionals do not have a lien on the service unlike in case of goods. There are no documents of title to services which can be put through the bank and hence, the recoverability is always doubtful.
Under Income Tax Act, the Government collects 95% of the tax by way of advance tax and tax deducted at source, only less than 5% tax is collected by way of regular assessment, this is one of the reason the Department is accepting most of the returns under section 143(1). The assessee has to deduct the tax, deposit the same to treasury of government and if there is delay, the assessee is made liable to pay interest and penalty and also subject to prosecution. This is for doing the honorary duty to the government for collecting the tax. Initially when tax was to be deducted at source, it was applicable only for salary and dividend. When the government realized that it is the easiest way of collection, the scope is extended year after year and now each and every payment is covered and if there is failure to deduct the tax, the entire expenditure is disallowed. In the case of service tax also initially few services were covered, but now it extends to each and every service with few exceptions. As per the proposed amendment to service tax, if there is failure, the assessees may be made liable for interest, penalty and also face prosecution.
All professionals follow the cash system of accounting and in many occasions inspite of rendering service and raising the bills, the payments are not received. In such a scenario can a law be passed by a democratic state asking the professionals to pay the Service Tax as soon as he renders the service, from his pocket, irrespective of whether he receives the amount or not?
It is high time, the intellectuals debate as to can such a law be passed just because the legislature is competent to pass the law. Many of the Member of Parliament may not be aware of the consequences. Hence, it is the professional who must make representation individually as well as through associations that the government cannot make the law which is impossible to perform, when cash system of accounting is followed. As per the proposed rule, the service tax is to be collected on rendering of service, payment received, issue of invoice or advance, whichever is earlier. All professionals follow the cash system of accounting and in many occasions inspite of rendering service and raising the bills, the payments are not received. In such a scenario can a law be passed by a democratic state asking the professionals to pay the Service Tax as soon as he renders the service, from his pocket, irrespective of whether he receives the amount or not? We hope the Government will withdraw the proposed provision to levy Service Tax on legal profession. If Government does not consider the representation objectively, only remedy would be to knock the doors of the Judiciary.
Coming to other proposals, there are three adverse provisions introduced in this finance bill; levy of Minimum Alternative Tax on SEZ, Distribution Tax on SEZ and levy of Minimum Alternative Tax on Limited Liability Partnership (LLP). These provisions are contrary to the doctrine of promissory Estoppel and affect the credential of the Government. Many must have made investment on the assurance that there may not be Minimum Alternative Tax and tax on distribution of profits. If Government tells them that now you are liable to tax, the entire price structure which the particular industry committed for sale in an international market may have to be changed and some of them may not be able to deliver the goods on a particular price as promised earlier. Similarly people might have formed the Limited liability partnership on the assurance that there is no MAT provisions applicable. If MAT provision will be made applicable they would not have converted the firm in to LLP. There is complete lack of accountability and stability in our tax jurisprudence. This is one of the reasons that many people are not willing to invest in India as they cannot plan or decide the tax liability.
We, therefore, suggest that the Government must commit that this is the law at least for the next five years and they will not make amendment retrospectively only to overcome any adverse judgment against the government. If any law had to be amended it will be amended prospectively after giving sufficient notice to the parties to be effected. There may be certain interpretation which may be against the assessees and contrary to the intention of the legislation; such amendment may be made retrospectively as soon as the decision is rendered by the Tribunal or the Court.
We are of the opinion that there has to be a research team consisting of the tax administration, tax professionals, Judiciary, representative of the industry and nominated members of the parliament to study the impact of important judgments and put forward the view of the committee to the Government objectively for better tax law and better tax administration. This will help immensely to have better law and administration.
We must also appreciate that this year in the finance bill the Hon’ble Finance Minister has made provision of 1000 crores for department of Justice. According to Hon’ble Finance Minister, this will help in building judicial infrastructure and the project of e-Courts. We desire the allocation for judiciary would be increased year after year so that the citizens can expect speedy justice from all courts and Tribunals. We also desire that when Tribunal celebrates 75 years in the year 2015 we can also have the e-Tribunal.
Dr. K. Shivaram
Editor in Chief, AIFTP & President, ITAT Bar Association
Reproduced with permission from the AIFTP Journal, March 2011
I agree with Govind Javeri’s comments.
The Author has rightly pointed out the anomaly when the accounts are legitimately maintained on cash system, how can one be saddled with service tax liability worked on mercantile system of accounting. His points on MAT on SEZ and distribution tax on SEZ are absolutely valid. Whereas there cannot be any justification to keep LLPs out of MAT.
However, his other argument to put Advocates above other professionals is not convincing. He says “When the legal practitioner is arguing the case before the Court or Tribunal he is considered as officer of Court and his duty is to assist the court to decide the case according to law. The professional fee of a legal practitioner cannot be equated with the commercial consideration”. The words “considered as officer of court” cannot be stretched to mean that the Advocates are courts itself; and hence immune to service tax liability. The Judge and other support staff are also officers of the Court but their remuneration attracts tax – income tax if not service tax. Hence why give special treatment to an Advocate!? The argument that fees of an advocate cannot be equated with commercial considerations is at best only specious. Advocates are known to charge 15% of compensation/award in MACT/Arbitration/Consumer Forum, etc. Advocates, depending on his/her standing in the market are charging hefty fees based on per minutes/hour of conference and per appearances. If this is not commerce, what is it? And when it is commerce, why keep it away from service tax net? If the legal profession, unlike CA profession, is held to be not creating any value addition, then it deserves to be taxed heavily as a negative profession.
Once upon a time, practice of medicine was considered to be a noble profession. Now it is basking in naked commerce – at times blatantly unethical as Human Anatomy is considered as commodity meant to be processed by unscrupulous butchers. In my opinion, even doctors should also be covered under the service tax net. Just because Constitution provides that every person has a fundamental right to have access to legal service or medical treatment, the same cannot be treated as an excuse to keep them out of service tax. Every one has constitutional right to have shelter on his head. However, even that shelter is now subjected to VAT and Service Tax under certain circumstances. There is no justification to treat the legal profession any different from other professions. All professions have commercial considerations. All professions are equal and legal profession cannot be held to be more equal than others.
Outcry is obvious when there is a pinch. No doubt for nation building resource is required but where is the reciprocal guarantee that the resource collected is utilised for the purpose it meant?. Unfortunately when it comes to such guarantee – under constitution or law simplicitor – it is the so called “Government” is first to breach it and ironically there is no accountability or penal consequence for its such failure. Therefore, if the “Government” wishes to penalise for failure to deduct TDS, etc. it should equally reward the ones who do the said duty imposed. Primarily it is duty of the Government official to collect tax but it is shrugged off and such burden is shifted to other party i.e. taxpayer. Is it not improper to ask someone to do a job that does not belong to him? Businessmen or professionals or any taxpayer is basically aimed to make “money” i.e. earn income and let them be free to that job best. After it is so earned, it is Government who should keep track that tax thereon is paid properly and if it fails to do it, let it be its failure and suffer. To do this, let credible transparent system be created. And yes, if this is utopian thought then let all politicians be equally held liable for their collective failure to build a nation. Let each politician be made liable to pay the shortfall for his failure to make his constituency competent enough to contribute by way of taxes. Please also incorporate a amendment and include services rendered by Politicians be also covered for service tax. Let them too contribute to nation building and accept openly that politics is a business.
The Service Tax on advocates, is restricted only to advice given to individuals/business in connection with their commercial activities and does not include appearance of an advocate in connection with any litigation, before any Tribunal/Court. This aspect appears to have not be taken into consideration in the chain of discussion. Further, Right to legal remedy is a fundamental right under our constitution, hence i am of the opinion, service rendered by an adovcate in a ligation before a Court of law is not under Service Tax Net.
Dr K Shivaram has rightly said. The amendment should be protested by all advocates because if it is allowed to be enacted the impact will be be very bad. The government is bent upon towards a fiscal terrorism, by making these type of proposals, The CA community should think sincerely the impact of accrual systems , With the introduction of accrual systems , the entire long long established scenario of cash basis of accounting will be spoiled, and practically may not possible to prepare the accounts truly on accrual basis. The professionals are professionals and not businessmen. Moreover, there is lot of difference between the service rendered by advocate and CAs from many different point of views.
I agree with R.Sekhar and it is a consumer tax so every profession howsoever noble like medical (highest noble) may accept that taxes help government provide for the needy and nation building, if lawyers donot want to partiipate in nation building services, let those lawyers go out of court into sublime. Thanks.
With great respect, I beg to differ:
The ultimate incidence, after all ,is on the Consumer(Clients) , that too on a Cenvatable basis…
InService tax levy, there can not be discrimination on grounds of which service is new(IT) or Old ..
On grounds of “being a Noble Profession” far too many Services would vie for the slot …For example, Medical profession ‘s claim to it can not be argued othrwise at all…
The Legal profession has been spared for the past 15 Years without any apparent rationale..
Even the Budget 2011 proposal exempts Individual Lawyers(Senior Counsels, for example)- a privilege not extended to the others..
Come on, let every Service provider collect and contribute…
very good article – the sentence ” It is high time, the intellectuals debate as to can such a law be passed just because the legislature is competent to pass the law” is very apt. The author has beautifully brought out why accrual basis for tax remittance, is not suitable for professionals. it would have more welcome if the argument was placed on behalf of all professionals (or even on behalf of the entire service provider clan) rather than narrowing it down to one profession by concluding – ” We hope the Government will withdraw the proposed provision to levy Service Tax on legal profession”