New Service Rules effective 1st September 2009

Legal Services in the Tax Web

Introduction

Traditionally believed to be a party of the trinity of noble professions, law was far beyond the shadows of Service Tax. The Finance Minister Pranab Mukherjee trampled this chimera in his Budget Speech for the year 2009-2010 by inserting Clause (zzzzm) in Sub-section 105 Section 65 of the Finance Act, 1994.
The wings of the noble profession were curtailed by bringing her within the ambit of Service Tax, an indirect tax levied by the Central Government; vide Entry 97 of Schedule VII of the Constitution of India through Chapter V of the Finance Act, 1994. According to the proposal of Budget 2009-2010, come 1st September 2009 and four additional services viz Legal Advice & Consultancy, Transport by Railway, Inland Waterways and Cosmetic Surgery will be brought within the Service-Tax net.

Legal Services in the Tax-web

The taxable services are defined under section 65 of the said Act. Section 66 is a charging section of the Act. The relevant provision clause (zzzzm) in Sub-section 105 Section 65, Finance Act, 1994, bringing Legal Advice & Consultancy within the domain of Service-tax reads:
“to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner: Provided that any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.
Explanation- For the purposes of this sub-clause, “business entity” includes an association of persons, body of individuals, company or firm, but does not include an individual.”

Business Entity in Tax-Net

A perusal of the provision leaves many questions unanswered then it answers. As is clear, Legal Services will be taxed if they are provided by one Business Entity to another. Thus, if either the Service Provider or the receiver of the legal services is an individual, the services are not be taxed. Explanation to the provision seeks to define what a ‘Business Entity’ is for the purposes of this tax. It includes as per the explanation, an association of persons, body of individuals, company or firm. Thus Law Firms or the more recent Limited Liability Partnerships (LLPs) providing Legal Advice to another business entity such as a company, firm or LLP, will be within the tax-net.
By discriminating between the Individual and Business Entity, the provision has brought about a seething discrimination between the individual Legal Service Provider and Law Firms. One practical implication of this could be that in order to elude the tax-net, law firms instead of billing as business entity, may bill in individual name to individual clients.
Secondly, litigation has been kept away from the shadow of tax-net. As the provision reads that any appearance which may be before any Court of Law, Tribunal or Authority shall be out of the tax-net. However, what the provision does not specify is if the meeting and briefs to a Senior Counsel in the chambers or a meeting in the Office would be subject to tax.
Interestingly, by referring to advice and consultancy in law, the proviso ensures that not only the law firms providing legal advice and consultancy are brought within the tax-net, but also those with a non-legal aura, but providing legal services are taxed.

Unanswered Questions

From a chastely legal perspective many questions remain unanswered. One such intriguing question is the treatment of legal service provided by an Indian Law Firm to a an offshore business entity. Rule 3 of Export of Service Rules, 2005 notified under Notification No.9/2005- S.T., dated 03-03-2005 that came into effect on 15-03-2005 lays down the criteria for treating a taxable service as an Export of taxable service. Clause (1) of Rule 3 makes a reference to particular taxable services specified in clause (105) of Section 65 of the Finance Act, 1994. Clause (2) of the Rule states when such services are deemed to be Export of Taxable Service. Rule 4 elucidates the position by stating that any service, which is taxable under Section 65(105), may be exported without payment of Service Tax. According to Rule 3(2), for a Service to be held as export of Taxable Service and therefore exempt from Tax-net, following conditions have to be specified:
The Service is provided from India;
The Service is used by the Business Entity Outside India and
Payment for such service has been received by the Service Provider in convertible Foreign Exchange.
For the sake of clarity and to avoid any legal commotion in the Courts, it would be prudent, if the Clause (zzzzm) in Sub-section 105 Section 65 of the Finance Act, 1994 be explicitly alluded to in Rule 3. This is particularly important in the light of the intention to tax a service in the first place. CBEC Circular No.56 dt. 25-04-03, emphatically acknowledged that Service-tax is a destination-based Consumption Tax and is required to be paid at a place where the Services are consumed. Thus, for a Service which is provided by an Indian Law Firm and consumed on a foreign land, can definitely not said to be consumed on the Indian territory and therefore, should be manifestly discharged from the Service tax.
According to estimates, the Indian Legal Advice and Consultancy market is worth Rs 500 crore and the Government anticipates to garner about Rupees 50 crore, that is service tax levied @ 10%, as per the new rates, by brining the services within the tax-net. Apparently, the resolved fondness for bringing Legal Advice and Consultancy in the tax-net is to bring the Foreign Law Firms providing legal services in Indian territory within its domain.
Services provided from outside the limits of Indian territorial waters can now be taxed in the light of Section 66A of the Finance Act, 1994 w.e.f. 18-04-2006 and Taxation of Services(Provided from Outside India & Received in India Rules, 2006 w.e.f. 19-04-06. Section 66A is a charging Section to levy tax on Services received from Outside India.


Conclusion
As the ambit of Service-tax is increased to bring newer services in it, legal services seem to be the latest addition including three other services. Though the merits of inclusion are beyond the scope of discussion of the present article, it would nonetheless be advisable to issue more clarifications particularly in relation to the concerns raised in the present article, lest there be uncalled for litigation for the latter is still away from the tax-net!!