As we are aware that in the Union Budget 2016-17, the Government amended the provisions relating to legal services to provide that such services, if provided by senior advocates, were exempt from service tax but only when the same were provided to any person other than a person ordinarily carrying out any activity relating to industry, commerce or any other business or profession (i.e. to an individual). Further, legal services provided by senior advocate to an advocate, or firm of advocates, or a business entity, were made liable to Service tax on forward charge for the first time.
However, being aggrieved by the above, several petitions were filed before different High Courts by senior advocates. In disposing such petitions, the Gujarat, Delhi and Calcutta High Court have granted a stay on the operation of the Notification No. 9/2016 – ST, 18/2016 – ST and 19/2016 – ST all dated 1 March 2016 (Amendment Notifications).
In this regard, the Ministry of Finance ('MoF') has recently issued Notification 32/2016-ST, 33/2016-ST and 34/2016-ST all dated 06 June 2016, the implications of which have been discussed below:
Notification 32/2016-ST, dated 06 June 2016
Notification 32/2016-ST, dated 06 June 2016, aims to amend Notification 25/2012-ST, dated 20 June 2012 ('Mega Exemption Notification') to exempt legal services provided by a senior advocate to:
- any person other than a business entity; or
- a business entity with a turnover up to INR 10 lakhs in the preceding financial year.
In other words, legal services provided by senior advocate to a business entity with a turnover of more than INR 10 lakhs, will be taxable.
Notification 33/2016-ST, dated 06 June 2016
Notification 33/2016-ST, dated 06 June 2016, has provided for amended in Service Tax Rules, 1994('the Rules') by:
- Substituting Rule 2(1)(d)(i)(D)(II) of the Rules, and
- Insertion of a new Rule 2(1)(d)(i)(DD)
As per the substituted Rule 2(1)(d)(i)(D)(II), in addition to individual advocate or firm of advocates, services provided by senior advocates shall also be taxable under reverse charge mechanism.
Further, in terms of newly inserted Rule 2(1)(d)(i)(DD), in case of representational services provided directly by senior advocates or indirectly through another advocate or firm of advocates, the recipient of such services, i.e. the Business Entity who is litigant/ applicant/ petitioner, shall be liable to pay Service tax under reverse charge.
Notification 34/2016-ST, dated 06 June 2016
The above mentioned notification aims at amending Notification No. 30/2012, dated 20 June 2012, to specify that for services provided by senior advocate, 100% payment of Service tax shall be made by the recipient of the services.
Further, by virtue of Notification 34/2016-ST, dated 06 June 2016, anExplanation III has also been inserted in Notification No.30/2012, dated 20 June 2012, which provides that the business entity located in the taxable territory who is litigant, applicant or petitioner, shall be treated as the person who receives the legal services for the purpose of the reverse charge notification.
It is interesting that no separate definition of the term Senior Advocate has been provided. However, the same has been defined under section 16 of the Advocates Act, 1961 as follows:
(1) There shall be two classes of advocates, namely, senior advocates and other advocates.
(2) An advocate may, with his consent, be designated as senior advocate if the Supreme Court or a High Court is of opinion that by virtue of his ability standing at the Bar or special knowledge or experience in law] he is deserving of such distinction.
(3) Senior advocates shall, in the matter of their practice, be subject to such restrictions as the Bar Council of India may, in the interest of the legal profession, prescribe.
(4) An advocate of the Supreme Court who was a senior advocate of that Court immediately before the appointed day shall, for the purposes of this section, be deemed to be a senior advocate: Provided that where any such senior advocate makes an application before the 31st December, 1965 to the Bar Council maintaining the roll in which his name has been entered that he does not desire to continue as a senior advocate, the Bar Council may grant the application and the roll shall be altered accordingly.
In conclusion, it may be said that the Service tax exemption will benefit both - the senior advocates and the business entities having turnover of less than INR 10 lacs.
Clarity however will be required for taxability of such service during the intervening period (i.e. 1 April 2016 – 5 June 2016) since the new notifications are effective from 6 June 2016.
Further, it is likely that considering the amendment, it is expected that courts would dispose the petitions favorably.
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