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