Service tax on Legal Consultancy Service

As per Service Tax Rules, 1994, ‘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. Legal service would include advice, consultancy, technical assistance in legal matter and appearance before court and various judicial and quasi-judicial authorities. Service tax was first introduced on ‘Legal Consultancy Service’ from 01.09.2009 by the Finance (No.2) Act, 2009 by inserting clause (zzzzm) in Section 65 (105) of the Finance Act, 1994.

As per Notification No.30/2012, any legal services provided or agreed to be provided by individual advocate or a firm of advocates by way of legal services and arbitral tribunal, the service tax has to be discharged by the service receiver i.e. business entity on 100% Value of service under reverse charge mechanism.

As per Notification No.25/2012, legal service tax is exempt if service is provided by,-

1. an arbitral tribunal to –

1. Any person other than a business entity; or
2. A business entity with a turnover up to rupees ten lakh in the preceding financial years

2. an individual as an advocate or a partnership firm of advocates by way of legal services to,-

1. an advocate or partnership firm of advocates providing legal services
2. any person other than a business entity; or
3. a 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;

Under reverse charge service tax is payable on payment basis instead of accrual basis i.e. service tax liability to be discharged at the time of payment not at the time of receiving of invoice provided payment has been discharged within six months. If payment not made in six months then service tax liability to be discharged along with interest from the date of invoice.

The CENVAT credit cannot be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient. However, service tax discharged under reverse charge on legal service can be used as CENVAT credit for discharging the service tax liability on output taxable services and Central Excise duty.

With the introduction of reverse charge mechanizm, the receiver of the service is liable to pay tax and to comply for all the statutory compliances in place of service provider. This has become an additional task for the service receiver. However service tax under reverse charge mechanism is posing a challenge.

The above article is authored by Ganeshan Kalyani and he can be reached via email on [email protected])