EXEMPTION TO LEGAL SERVICES

Exemption to Services provided by an Advocate or a Person represented on and as Arbitral Tribunal

Vide Notification No 25/2012- ST dated 20.6.2012, w.e.f. 1.7.2012, services provided by-

     (a) an arbitral tribunal to -

(i)    any person other than a business entity; or

(ii)   a business entity with a turnover up to rupees ten lakh in the preceding financial year;

    (b)  an individual as an advocate or a partnership firm of advocates by way of   legal services to,-

(i)   an advocate or partnership firm of advocates providing legal services ;

(ii)   any person other than a business entity; or

(iii)  business entity with a turnover up to rupees ten lakh in the preceding financial  year; or

(c)    a person represented on an arbitral tribunal to an arbitral tribunal;

are exempt from levy of Service Tax.

What is exempt is a service provided to a non- business entity by -

(i)   individual advocates

(ii)  person represented on/as arbitration Tribunal

If the services are provided to a business entity or are provided by advocate firm or law company or by any person who is not a arbitral Tribunal, it will be subjected to levy of service tax subject to monetary limit.

Definitions

Section 2(1)(a) of Advocates Act, 1961 defines ‘advocate’ means an advocate entered in any roll under the provisions of this Act. As per Wikipedia an advocate is a term for a professional lawyer used in several different legal systems.

‘Arbitral Tribunal’ as per section 2(1)(d) of the Arbitration & Conciliation Act, 1956 means a sole arbitrator or a panel of arbitrators. Under section 2(1)(a), arbitration means any arbitration whether or not administered by permanent arbitral institution.

‘Business entity’ has been defined in section 65B(17) to mean any person ordinarily carrying out of any activity relating to industry, commerce, business or profession.

‘Legal services’ are defined in Notification No 25/2012-ST to mean any service provided in relation to advice, consultancy, or assistance in any field of law, in any manner and includes representation services before any court, tribunal or authority 

         Advocates can provide services either as individuals or as firms. Legal services provided by advocates or partnership firms of advocates are exempt from service tax when provided to the followings:

• an advocate or partnership firm of advocates providing legal services (same class of persons)
• any person other than a business entity
• a business entity with a turnover up to rupees ten lakh in the preceding financial year

However, in respect of services provided to business entities, with a turnover exceeding rupees ten lakh in the preceding financial year, tax is required to be paid on reverse charge by the business entities. Business entity is defined in section 65B of the Finance Act, 1994 as 'any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession'. Thus it includes sole proprietors as well. The business entity can, however, take input tax credit of such tax paid in terms of Cenvat Credit Rules, 2004, if otherwise eligible. The provisions relating to arbitral tribunal are also on similar lines.

Taxability Matrix

* Includes Limited Liability Partnership (LLP)

Arbitral tribunal comprising more than one arbitrator will constitute an entity by itself. Thus services of individual arbitrator when represented on such an arbitral tribunal will also constitute service by one person to another. However, such service is exempt under Sr. No. 6(c) of the mega notification.

Payment of Service Tax

Individual advocates and arbitral tribunals are not required to pay service tax on the services provided by them. Such persons providing exempt services need not charge service tax in invoices. However, when such services are provided to a business entity, the business entity is required to pay service tax under reverse charge and it can take input tax credit of such tax paid. (Refer Notification No. 30/2012-ST dated 20.6.2012). In case of liability of payment of service tax under reverse charge, advocates may not charge service tax in their bill and it will be the liability of service recipient business entity to pay service tax in the gross amount changed by legal service provider. However, it would be desirable for the service provider to mention a note at the foot of the invoice that service tax shall be payable by recipient under reverse charge at applicable rates and above amount does not include Service Tax. The following note may be used –

“Since Service Tax is payable under reverse charge by the recipient of our legal services, in terms of Notification No. 30/2012-ST, the bill amount does not include Service Tax”

This may be necessary as if the advocates charge Service Tax in the invoice, where they are not supposed to pay, accounting may pose a problem.  However, there could be an issue on it being a proper invoice for the purpose of Service Tax and Cenvat Credit.

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