1. Meaning of Legal Services
Prior to Corrigendum dated 25th Sep 2017,
"Services supplied 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 located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity."
To remove the ambiguity, changes have been made in the definition vide Corrigendum dated 25th Sep 2017.
"Services provided by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly,…"
Explanation - "Legal Service" means 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.
Author's Comment - Now legal service is not limited to representational service but it also covers any type of advice or consultancy of any law.
2. When will Legal Services provided by an Advocate fall under Reverse Charge?
As per Notification No. 13/2017 - Central Tax (Rate) dated 28th June 2017, there are three conditions which are required to be fulfilled:
Condition 1 - The Service provider should be :
- An individual advocate including a senior advocate, or
- A firm of advocates by way of legal service.
Condition 2 - Recipient should be:
Any business entity.
Condition 3 - Location:
Recipient should be located in the taxable territory.
3. When is an Advocate required to be registered?
As per Notification No. 5/2017 - Central Tax (Rate) dated 19th June 2017, suppliers who are only engaged in making supplies of taxable goods or services or both, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services or both under section 9(3) of CGST Act, 2017 are exempted from obtaining registration.
When the service provided is covered under Reverse Charge Mechanism (RCM), the advocate is exempted from GST Registration.
4. When are Legal Services exempt?
As per Notification No. 12/2017 - Central Tax (Rate) dated 28th June 2017, read with Notification No. 2/2018 - Central Tax (Rate) dated 25th Jan 2018, Legal Services are exempted from GST when,
A. A partnership firm of advocates or an individual as an advocate other than a senior advocate, provides legal service to :
(i) An advocate or partnership firm of advocates providing legal services; or
(ii) Any person other than a business entity; or
(iii) A business entity with an aggregate turnover up to twenty lakh rupees (ten lakh rupees in the case of special category states) in the preceding financial year; or
(iv) Central Government, State Government, Union territory, local Authority, Government Authority or Government Entity.
B. A senior advocate by way of legal service to :
(i) Any person other than a business entity; or
(ii) A business entity with an aggregate turnover up to twenty lakh rupees (ten lakh rupees in the case of special category states) in the preceding financial year or,
(iii) Central Government, State Government, Union territory, local Authority, Government Authority or Government Entity.
Important Note - A Senior Advocate providing legal service to an Advocate or Advocate firm is not exempt.
"Special category States" as specified in Article 279A(4)(g) of the Constitution, includes the State of Assam, Arunachal Pradesh, J&K, Himachal Pradesh, Uttarakhand, Manipur, Mizoram, Sikkim, Meghalaya, Nagaland and Tripura.
5. Is it mandatory for recipient to get GST registration?
As per Section 24(iii), persons who are required to pay tax under RCM shall mandatorily take registration in GST .
Therefore, if legal services are not exempt and the recipient is a business entity located in the taxable territory then the recipient shall get himself registered in GST to pay tax under reverse charge.
6. Can the liability under RCM be adjusted through Input Tax Credit?
Any amount payable under Section 9(3) of CGST Act and Section 5(3) of IGST Act, under RCM shall be paid by cash only. Reverse charge liability cannot be discharged by using input tax credit.
Now there are certain important queries which we need to analyze.
Q1. If the recipient is not carrying any business but is taking legal service from an advocate, what is the applicability of RCM and is the recipient required to take mandatory registration in this case as per Section 24(iii) of CGST Act?
Ans - No Reverse Charge is applicable in this case because recipient is not a specified recipient. As per Notification No. 13/2017, if the recipient is a person who is doing business then it would be applicable.
Also, it is worthwhile to note that in case service is exempt, then the question of reverse charge does not arise. As per Sr No. 45(b)(ii) / 45(c)(i) of Notification No. 12/2017 as explained above, it is clearly stated that if the recipient is a person other than business entity then the service is exempt.
Q2. If the recipient is carrying on business but below threshold limit, is the recipient required to pay taxes under RCM?
Ans - Same as above, as per Sr No 45(b)(iii) / 45(c)(iii) of Notification No. 12/2017, if the recipient is a business entity with an aggregate turnover upto threshold limit then legal service is exempt. Again the underlying service is exempt so no question of reverse charge.
Q3.What are the possibilities of reverse charge in case where the Recipient is located in Non Taxable Territory and taking legal service from an Indian Advocate?
Ans - In case services are provided outside India, then RCM is not applicable as the business entity is located outside taxable territory.
However the service is not exempt as per Notification No. 12/2017 and hence, the Advocate is required to take GST Registration. An invoice will be raised in this case. Also, services provided outside India may qualify as Export of Services provided all conditions of Section 2(6) of IGST Act are fulfilled.
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