JULY 07, 2009

Service tax on legal consultancy: Will it also cover foreign law firms?

By V Lakshmikumaran, Managing Partner, Lakshmikumaran & Sridharan, Advocates

PROFESSIONAL services provided by Engineers, Chartered Accountants, Cost Accountants, Company Secretaries, Architects, Management Consultants, etc. have been subjected to service tax for more than a decade. The services provided by lawyers and doctors, for some reason, were kept out of the service tax net till now. Interestingly, the previous Finance Minister, who himself is a lawyer by profession, tried to justify his decision not to tax legal practitioners by stating that there is a popular belief that lawyers render no service.

Even though legal advisory services, especially in tax and corporate laws, provided by Chartered Accountants and other professionals are liable to service tax, consultancy services provided by lawyers remain un-taxed. This created an anomaly between similar services provided by different classes of professionals. This disparity has been sought to be addressed to some extent in the present Budget.

The first signs of levying service tax on legal services were seen in the year 2006 when the Empowered Committee of State Finance Ministers proposed to transfer 124 services to the States for being taxed by the States. This list of 124 services included 67 services, which were at that point of time being taxed by the Central Government. The remaining services were new services like legal services, education, healthcare services, etc. Thus, the indications were that legal services would be given to the States for taxation.

The issue of taxability of legal services also came up when ‘business support services’ were introduced from May, 2006. Apparently, the all encompassing definition of ‘business support service’ created a doubt in the minds of many law firms as to whether their advisory services to corporate clients would get taxed under this entry. This provoked the Service Tax Commissionerate, Delhi to clarify in 2007 that legal services were still not leviable to service tax.

Finally, after fifteen long years of the service tax regime, the Government has proposed to levy service tax on legal consultancy services. Significantly, the proposed tax is on legal consultancy/ advisory services rendered by any company or firm or AOP/ BOI to any business entity. In other words, all lawyers and other consultants practicing as individuals will not be liable to service tax. Similarly, legal consultancy services provided to clients who are individuals will also not attract service tax, even if such services are provided by a law firm or company. Thus, a number of individual legal practitioners will continue to be out of service tax unlike other professionals (like CAs, Engineers, Architects, Management Consultants, etc.), who are liable to tax even if practicing as individuals.

The scope of legal services sought to be covered is ‘advice, consultancy or assistance in any branch of law’. Specifically, any service by way of appearance before any court, tribunal or authority has been excluded from the coverage. Even in case of CA/ CWA/ CS, exemptions have been granted to representations made before statutory authorities. However, what remains to be seen is whether the following services provided by legal practitioners will also get covered under the net:

Further, in case of CA/ CWA/ CS, currently the services rendered by the practicing members of respective professional bodies in India are only covered. Similar services rendered by foreign professionals outside India are not liable to service tax in India. On the other hand, it is not clear whether service tax will become applicable on legal services rendered by overseas law firms/ companies outside India to clients located in India. Similarly, taxability of services provided by law firms/ companies in India to clients located abroad needs to be addressed.

The above issues may get answered based on the proposed categorization of legal consultancy services in the Export and Import of Services provisions. Till such time, the legal fraternity and the business would keep their fingers crossed.