JUNE 29, 2016

By Nalin Bajaj & Shashank Kumar, Lakshmikumaran & Sridharan, Mumbai

UNDER Service tax law, a service provider broadly has 3 statuses: exempted, paying tax on forward charge or tax being paid on his services under reverse charge. Within a span of roughly two months, a special class of service provider has been conferred all the three statuses.No prizes for guessing, they are the Senior Advocates!

In 2009, service of advice, consultancy or assistance in any branch of law provided by a business entity to another business entity was made liable to service tax for the first time. However, the levy was not extended to service of appearance before any court, tribunal or authority. Services by a Senior Advocate were not taxable.

In 2011, individual Advocates were brought within the service tax net for the first time. Service by a business entity to individuals was also made taxable. Further, representational service provided to a business entity by any person was made taxable for the first time. A distinction was sought to be made between representational and other services. This resulted in the following responsibilities on individual and Senior Advocates:

- taking service tax registration

- collecting and paying service tax

- filing returns and maintaining records

This proposal was met with strong opposition from the legal fraternity and the validity of the levy itself was challenged in various judicial fora.

In 2012, the burden of paying service tax, in respect of consultancy/advisory and representational services provided to business entity by an Advocate or firm of Advocates, was shifted to the service recipient under reverse charge mechanism (‘RCM').The services by an individual Advocate or a firm of Advocates to an individual Advocate or a firm of Advocates was exempted. This move by the government effectively ended the unrest.

The above sequence of events begs an interesting question: Whether the opposition was to the levy of service tax or to the compliance burden that ensued ?

As a well-intended move towards GST, the Government tried to bring a small subset of the Advocates' community i.e. Senior Advocates under forward charge from 1 st April 2016, but experienced the 2011 Déjà vu. Within a span of 2 months, the amendment was rolled back and the status of reverse charge was restored.

Reverse charge generally is justified only in the following scenarios:

- Where the cost of tax collection is not justified in view of the tax sought to be collected.

- Where the provider of service is located outside the taxable territory – Import of service.

- Where service receivers are few and providers are many and scattered– Insurance Agents.

- Where service is provided by unorganized sector – GTA

Here, another intriguing question: Why the special status of reverse charge for legal services and whether such a distortion is necessary from a policy perspective?

Whatever may be the history and policy background, let us now look at legal and business implications of the amendments taking effect from 6th June 2016 [Notification No. 32/2016-ST dated 06.06.2016 modifies exemption available on Senior Advocate's service, Notification No. 33/2016-ST dated 06.06.2016 defines person liable to pay service tax on Senior Advocate's service, Notification No. 34/2016-ST dated 06.06.2016 prescribes extent of payment of service tax by business entity]

Implications on Senior Advocates

- The Senior Advocates remain outside the Service tax net without any compliance burden.

- Service provided by Senior Advocates to law firms, individual Advocates and any business entity shall be taxed under RCM.

Implications on the individual Advocates/firm of Advocates

- In case of representational service provided by Senior Advocate to a business entity who is litigant, applicant, or petitioner, as the case may be, through an individual Advocates/firm of Advocates, the latter shall not be required to pay service tax under RCM.

- Individual Advocates/firm of Advocates will have to pay service tax under RCM on other than representational service received from Senior Advocate in case they are contractually the recipient of service .

- No CENVAT credit shall be available to individual Advocates/firm of Advocates of service tax paid under RCM. Naturally, this service tax cost will be passed on to the business entity receiving service from the individual Advocates/firm of Advocates there by increasing the cost of legal services.

Implications on the clients

- In respect of representational services provided by Senior Advocate, the business entity who is litigant, applicant, or petitioner, as the case may be, shall be the person liable to pay service tax under RCM.

- In respect of services other than representational services provided by a Senior Advocate, the contractual recipient of the service shall be the person liable to pay service tax under RCM.

- There is an apparent possibility of tax cascading if the contractual recipient of Senior Advocate's other than representational service is an individual Advocate or firm of Advocates. The cascading effect is illustrated below:

- Going forward, the crucial aspect would be to determine the contractual recipient of other than representational services provided by Senior Advocates. Above illustrated cascading effect and additional cost can be avoided only if Senior Advocate directly and contractually provides such service to the business entity. Alternatively, the pure agent route could be adopted.

- However, service provided by Senior Advocate to business entity having turnover less than Rs. 10 lacs in the preceding financial year has been exempted.

Issue for consideration

If the business entity is treated as the recipient of service provided by Senior Advocate and discharges service tax on reverse charge on the amounts paid to the Senior Advocate, what will be nature and taxability of service provided by the individual Advocate/ firm of Advocates who has facilitated the service between the Senior Advocate and the Business entity?

Conclusion

Insofar as representational services by Senior Advocates are concerned, the position is fairly clear that litigant, applicant, or petitioner, as the case may be, shall be the person liable to pay service tax under RCM. In case of other than representation service of Senior Advocate, the contractual recipient of service has to discharge the service tax liability. One would still ponder, whether reverse charge is justified, whether selectively distortive policy is healthy moving towards GST, can compliance burden be sufficient reason for allowing reverse charge? We cannot help but think that, to pay or not to pay – was probably the question!