Service-Tax on Legal Consultancy Service Compliance Guide Revised 280411

8/6/2019 Service-Tax on Legal Consultancy Service Compliance Guide Revised 280411

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Service-tax On legal Consultancy Service: Compliance Guide http://www.itatonline.org(Revised 28.04.2011)

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Service-tax On legal Consultancy Service: Compliance Guide (Revised 28.04.2011)

By CA Rajkamal Shah

Service tax was first introduced on Legal Consultancy Service from 01.09.2009by the Finance (No. 2) Act, 2009 by inserting cl. (zzzzm) in S. 65 (105) of the

Finance Act, 1994. The coverage of taxable service was limited to service

provided by a business entity to any other business entity. Further, the taxable

service was restricted to advise, consultancy or technical assistance in any

branch of law, in any manner, but not appearance before any court, tribunal or

an authority. Thus, service provided by an individual to any person and service

received by the individual from any person was not liable to tax.

The Finance Act, 2011 (enacted on 8th

April, 2011) has substantially increased

the scope of the levy which is explained in this article. This amendment comesinto force from 01.05.2011.

Amendments by the Finance Act, 2011 :

The levy of service tax from legal Consultancy Service is given hereinbelow

in question - answer form for easy understanding and better comprehension:

Q.1. Please explain the amendment in the taxable service of legal consultancy

by the Finance Act, 2011.

A.1. The Finance Act, 2011 has substituted sub-clause (zzzzm). The definition

read as follows :

(i) (zzzzm) (i) to any person, by a business entity, in relation to advice,

consultancy or assistance in any branch of law, in any manner;

(ii) to any business entity, by any person, in relation to representational service

before any cout, tribunal or authority;

(iii) to any business entity, by an arbitral tribunal, in respect of arbitration

The scope of Legal Consultancy Service can be derived from above definition

as follows :

The taxable service include advise, consultancy or assistance in any branch of

law by a business entity to any person.

Further, service provided to a business entity by any person in relation to

representation before any court, tribunal or authority is also included.


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Furthermore, service provided to a business entity by an arbitral tribunal in

respect of arbitration is also included. The word arbitration and arbitral

tribunal shall have the meaning assigned to them in the Arbitration andConciliation Act, 1996.

Q.2. Please explain the extent of the service tax law.

A.2. The service tax is introduced by the Finance Act, 1994. It extends to whole

of India except the state of Jammu & Kashmir. That means service provided by

a person from Jammu & Kashmir is not liable to tax.

Q.3. Please explain the meaning of business entity.

A.3. The meaning of business entity is contained in S. 65(19b) which provides

that, business entity includes an Association of Persons, Body of Individuals,

Company or Firm, but not include an individual.

It is a mute question whether an individual carrying business in proprietary firm

is regarded as business entity or not. The definition includes a firm but does not

include an individual. In the opinion of the writer, applying the principle of

noscitur a sociis, the word, firm takes meaning of the words, association of

person, body of individuals and company which signifies that a proprietary

concern may not be regarded as business entity.

Q.4. Please explain whether individual lawyers are covered in service tax? Ifyes, how?

A.4. Individual lawyers are covered if they provide representation service to a

business entity before any court, tribunal or authority.

Q.5. Are the individual lawyers covered if they provide advise, consultancy or

assistance in any branch of law?

A.5. No.

Q.6. A business entity providing advise, consultancy or assistance in any

branch of law to an individual is covered?

A.6. Yes.


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Q.7. Is an individual lawyer providing advise, consultancy etc or

representation service to an individual, covered?

A.7. No, service by an individual lawyer to another individual person is notcovered.

Q.8. It seems that the definition does not specify that the person providing

Legal Consultancy Service should be an advocate or a lawyer, holding a legal degree. Does it mean that a firm of income tax practitioners or sales tax

practitioners not having any member holding a legal degree and providingadvise, consultancy is covered under service tax?

A.8. Yes, such firms with or without persons holding legal degree are also

covered under the levy.

Q.9. It happens in practice that the solicitors having proprietary firms appoint

individual counsels to argue the case on behalf of its client which is a

business entity in a court of law, whether such counsels are required to

charge service tax to the solicitors?

A.9. On a plain reading of the definition it appears that service provided by an

individual to an individual is outside the ambit of the levy. However, the

counsel holding brief of the solicitor also holds authority to appear on behalf of

the actual client. The client is bound by the representation made by the counsel.In such a case, it can be said that the counsel is providing taxable service to the

client who is a business entity.

Q.10. In the situation stated in Q.9, Please explain the manner of raising bill

by the counsel.

A.10. The counsel should raise bill on the solicitor stating in the bill on

account of _______ and the solicitor either reimburse the amount from the

Escrow A/c of the client or make the client pay directly to the counsel.

Q.11. The solicitor in Q.9, also provide service of preparing a case, briefing

the counsel and other advisory and consultancy to the business entity. He mayinclude the counsels bill in his charge and the client pays the total amount to

the solicitor from which he pays to the counsel. What will be the liability of

the solicitor?


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A.11. The solicitor would be liable to pay service tax on the entire amount

received from the client which includes counsels bill including service tax in it.

The solicitor will get credit of payment of service tax to the counsel under

Cenvat Credit Rules and pay balance amount to the Government.

The solicitor may opt for reimbursing the amount to the counsel and issue

separate bill for his fees. In that case, the counsel would be required to pay

service tax on his bill and the solicitor would pay service tax on his fees

separately.

Q.12. Will the position be different in case of Advocate on Record and the

advocate appearing in the court?

A.12. When the business entity appoints some person as Advocate on Recordwho in turn appoint an advocate to represent the matter before a court, the same

principles in above examples will apply.

Q.13. A firm of Chartered Accountant appoints an individual advocate to

represent his client who is an individual in the tribunal. Whether the advocatewould be liable for service tax?

A.13. Upto 24.04.2011, the practicing chartered accountants, cost accountants,

company secretaries, were exempt from service tax in relation to representation

before any statutory authority in the course of proceedings initiated under anylaw, for the time being in force, by way of issue of a notice

1. The chartered

accountants etc. are now covered even in case of representation services to an

individual. However, from the discussion mentioned above, it can be said that

the advocate in fact provide service to an individual and not to the chartered

accountant firm. Therefore, an individual advocate may be regarded as

providing representation service to an individual and outside the scope of the

service.

Q.14. Please explain whether initial exemption of `10 Lakhs (threshold limit)

is available to this service? If yes, how the exemption works.

A.14. The threshold limit is provided under the Service Tax Law for small

service providers. In this context, exemption of `10 Lakhs of taxable service is

available (under notification no. 8/2008 ST dated 01.03.2008) to any service

1Notification No. 25/2006 ST dated 13.07.2006. rescinded by Notification No. 32/2011-ST dated 25.04.2011.


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provider including the Legal Consultancy Service provider. Conditions for such

exemption are as follows :

The exemption is based on the aggregate value of taxable serviceprovided in the previous financial year. For the purpose of the service

being introduced first time as a taxable service in the Statute Book, the

value of taxable service in the previous year would be regarded as nil.

The service provider would be eligible for the exemption upto the first

receipt of `10 Lakhs towards the taxable service provided.

The exemption is optional which means a taxable service provider may ormay not opt for this exemption. If the exemption is not opted, he would

be required to pay service tax from the first bill raised after the service

become taxable.

The person opting for exemption would not be entitled to claim Cenvatcredit of inputs, input service and capital goods until he start paying

service tax.

A service provider providing service from different places will have toaggregate the value of taxable service from all the places he is providing

taxable service for the purpose of exemption.

A service provider providing other taxable services will have to includethe turnover of receipt of all taxable services for the purpose of the

exemption.

The basic exemption scheme being optional, the option once exercised isfinal and cannot be revoked in the concerned financial year.

The exemption is conditional upon taxable service provided in theprevious financial year upto the basic limit. However, it is to be claimed

on the receipt of taxable service in the current year which means a taxable

service provided in the previous year, but the value received in the

current year is counted twice for the purpose of basic exemption.

Q.15. If the service provider has exceeded threshold exempted value of taxable

service provided, say in the F.Y. 2011-12, whether he can avail for exemptionin F.Y. 2012-13?


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A.15. No, the exemption is based on the provision of taxable service in the

previous financial year and hence only if the taxable value of service provided

in the previous financial year does not exceed the basic exemption limit, he is

eligible for the exemption again in the immediately following year.

Q.16. Can you explain the provisions regarding registration under service

tax?

A.16. A person providing taxable service and opting for basic exemption should

apply for registration within 30 days of crossing the limit of receipt of value of

taxable service of `9 Lakhs. The person not opting for exemption should obtain

registration within 30 days from providing from the date of issue of first

invoice. In case of new service, the person providing such service should obtain

registration within 30 days from issue of first invoice, if he has not opted for thebasic exemption.

Q.17. Please explain the procedure for registration.

A.17. The procedure for applying for registration is now online:

To login on www.aces.gov.in and obtain user name and password with email id

for communication.

Fill in Form ST-1 with complete details on the website ofwww.aces.gov.in. A PAN based ST Code Number would be generated.

The following documents should be attached for submission to theJurisdictional Officer :

i) Application in Form ST-1 in triplicate duly signed.ii) Attested copy of PAN card.iii) Proof of address of the premises which is required to be registered.iv) Copy of document governing the Constitution of organization (e.g.

partnership deed in case of partnership firm).

v) Authority Letter in favour of the person who is to collect theregistration certificate on letter head of organization applying for

registration.

vi) Power of Attorney in case the documents are signed by anauthorized representative.

vii) Declaration Form.


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Q.18. Whether registration certificate is available online? If yes, whether it is

required to be signed by the Jurisdictional Superintendent? In which form the

registration certificate is issued?

A.18. The registration certificate can be obtained online after submission of

above details to the Jurisdictional Superintendent and it is valid. There is no

requirement to get the certificate signed by the Jurisdictional Superintendent.

The registration certificate is in Form ST-2.

Q.19. Please explain the challan by which service tax is required to be paid.

A.19. GAR 7 is the challan by which service tax is required to be paid.

Q.20. Please state the date on which payment of service tax is required to bemade?

A.20. In case of individual and partnership firms, the service tax payment is to

be made on quarterly basis of a calendar year i.e. 5th

day of the succeeding

month of the end of the quarter. For example for the period April to June,

service tax is to be paid on 5th

July. However, in case of quarter ending March,

the payment is required to be made on 31st

March only. In case of the service

provider whose payment of service tax exceed `10 Lakh in the previous

financial year, he is required to make payment electronically by 6th

day instead

of 5th

day of the succeeding month.

Q.21. Whether service tax is to be paid on receipt of payment of the taxableservice provided or on issue of bills?

A.21. Prior to introduction of Point of Taxation Rules by the Finance Bill, 2011

the service tax was required to be paid only on receipt basis. However, the Point

of Taxation Rules were first introduced by the Finance Bill, 20112

which

required service tax to be paid on date of the provision of service or the issue of

invoice (it should be within 14 days of provision of such service) or receipt of

advance, whichever earlier.

These Point of Taxation rules were amended3

before passing of the bill by the

Parliament to provide that Service tax is to be paid in case of the persons

2Notification No. 18/2011 ST dated 01.03.2011.

3Notification No. 25/2011 ST dated 31.03.2011.


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providing as proprietor or partnership firm in the field of Legal Consultancy

Service, Practicing Chartered Accountants, Practicing Cost Accountants,

Practicing Company Secretary, Architect Service, Interior Decorators Service

and Scientist or Technocrat on receipt of payment (including receipt of advancefor service to be provided).

Q.22. Please explain the value on which service tax is required to be paid.

A.22. S. 67 of the Finance Act, 1994 provides that service tax is required to be

paid on gross amount charged by the service provider for such service provided

or to be provided. The gross amount charged for the taxable service includes

any amount received towards the taxable service, before, during or after

provision of such service.

In case of free service, no service tax is chargeable. However, in case whether

provision of service is for a consideration which is not ascertainable, the amount

will be determined as per the Service Tax (Valuation) Rules, 2006.

Where the gross amount charged by a service provider, for the service provided

or to be provided is inclusive of service tax payable, the value of such taxable

service shall be such amount as, with the addition of tax payable, is equal to the

gross amount charged (i.e. to be computed on the reverse formula basis, as if the

tax is included in the gross amount received).

In case of service to Associated Enterprise (to be determined as per S. 92A of

the Income Tax Act) any book adjustment by which the amount is debited or

credited, as the case may be, to any account, whether called Suspense

Account or by any other name, in the books of account of service provider (i.e.

on accrual basis).

Service tax is also payable on reimbursement of expense such as travelling,

boarding and lodging, conveyance etc, incurred during the course of providing

service. Certain exclusions are provided in Service Tax (Valuation) Rules, 2006

in relation to expenses incurred as pure agent. This exclusion interalia relatesto expense incurred during the course of providing service, subject to eight

conditions prescribed therein which have to be satisfied simultaneously. Some

of these conditions are that recipient of service should receive and use such

services procured by the service provider, authority to service provider to make

the payment on his behalf and reimbursement of actual amount incurred.


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Q.23. An advocate provides service to a Non-resident. Whether he will be

liable to pay tax, if the payment is received in Convertible Foreign Exchange?

A.23. The Legal Consultancy Service falls in recipient base criteria. If theperson who receive this service is located outside India at the time of rendering

the service, the advocate would be entitled for the benefit of export of service as

per the Export of Service Rules, 2006 if the payment is received in Convertible

Foreign Exchange. The Point of Taxation Rules have now provided that such

person would be liable to pay tax if the payment is not realized in Convertible

Foreign Exchange within the time specified by the Reserve Bank of India.

Q.24. Please explain the provisions as regards to filing of service tax returns.

A.24. Half yearly service tax returns are to be filed in form ST-3 within 25 daysfrom the end of half year of a calendar year, i.e. by 25

thOctober for the half year

ending April to September and 25th

of April for half year ending October to

March.

Q.25. What are the records required to be maintained?

A.25. The following records are required to be maintained by a service provider

under Rule 4A of Service Tax Rules, 1994 :

No specific records are prescribed under the rules. The recordsmaintained by the service provider in accordance with other laws are

acceptable. They may be manual or computerized. However, it is required

that the service provider should furnish a list of the records maintained

with the first return.

Every person providing taxable service is required to issue aninvoice/bill/challan signed by such person or a person authorized by him.

Such invoice/bill/challan shall be serially numbered and contain the

following details :

a) Name, Address & Registration Number of Service Provider.b) Name & Address of Service Receiver.c) Description, Classification and Value of Taxable Serviced) Service Tax Payable

Non-maintenance of proper records and non-issue of invoice aftercompletion of service within 14 days may entail the penalty of `10,000/.


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Also the concealment penalty of 100% of tax payable is applicable if the

invoices are not issued within 14 days or it is not entered into the books

of account (from the notified date upon enactment of Finance Act, 2011).

Q.26. What is the rate of interest on late payment of service tax?

A.26. 18% per annum, from the date of enactment of Finance Act, 2011 based

on number of days of delay. Prior to this, the rate of interest was 13% per

annum. The rate of interest is reduced to 15% in case of small service providers,

whose turnover of taxable service does not exceed `60 lakhs in the financial

year covered by Show Cause Notice or the last financial year.

Q.27. Whether Cenvat credit can be availed by the service provider?

A.27. Yes, in accordance with the amended Cenvat Credit Rules, 2004. From

01.04.2011, Cenvat credit can be availed on input service, inputs or capital

goods anytime on or after receipt of invoice/bill or challan by the service

provider. Such invoice etc. should be in conformity of the requirement of Rule

4A of Service Tax Rules, 1994 as discussed above. If the service provider fails

to make payment within 90 days of the date of the invoice, he will be required

to pay service tax equivalent to the Cenvat credit availed alongwith the interest.

Q.28. Please explain availment of Cenvat credit in case of Legal Consultancy

Service.

A.28. Availment and utilization of Cenvat credit is governed by Cenvat Credit

Rules, 2004. These rules are amended substantially from 01.04.20114. An

output service provider is eligible to avail the credit of following duties or taxes

paid for the purpose of providing output taxable service.

Excise duty on inputs Service Tax on input services (such as, i) service tax paid to another

Legal Service Provider or a chartered accountant, etc. which may be

regarded as identified input service against taxable output service, ii)common services like telephone, chartered accountants etc)

Excise Duty on capital goods like air-conditioner, computers etc

4Notification No. 3/2011 CX (NT) dated 01.03.2011 & 13/2011 CX. (NT) dated 31.03.2011.


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A Legal Consultancy Service provider who provides only taxable services, will

be entitled to avail full credit of tax or duty paid as stated above. However, if

such service provider also provides non-taxable service like representation

service to an individual, he will be entitled only proportionate credit of commonservices in the ratio of taxable service provided to all taxable and non-taxable

service. However, such service provider will be eligible to avail full credit of

input service availed directly for providing taxable output service (like another

Legal Service Provider). The credit may be taken as stated in answer to Q.27.

Further, once the credit availed, it can be utilized any time for the purpose of

payment of service tax. No time limit is prescribed for availment or utilization of

Cenvat credit.

Q.29. Please explain the penalty, prosecution or other garnishing provisions.

A.29. Yes, the penalties are as follows:

Late fees for delay in filing of returns (S. 70 r.w. Rule 7C) `500/- for first 15 days

`1,000/- for 16 to 30 days

`100/- per day beyond 30 days, maximum upto `20,000/-

Penalty for delay in payment of tax (S. 76) 1% per month or `100/- per day, whichever is higher, maximum penaltyupto 50% of the tax demanded

General Penalty (S. 77) `10,000/- for any contravention of any provision of the Act or Rules for

which no penalty is prescribed

Penalty for suppression of value of taxable service (S. 78) 100% of tax evaded or short paid ;

50% of tax, if true and complete details of transactions are captured in

specified records or 25% of tax, if the tax alongwith interest is paid within30 days from the date of communication of the order (the period of 30

days extended to 90 days in case of small service providers whose value of

taxable service does not exist `60 lakhs during during the financial year

covered by the Show Cause Notice or during the last preceeding financial

year).


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If penalty u/s. 78 is imposable, no penalty u/s. 76 would be levied Waiver of penalty u/s. 78 is available in specified circumstance, in case

where the assessee has captured true and complete details of transactionsin specified records subject to establishing reasonable cause for failure to

make payment of service tax.

Other garnishing provisions are made applicable as regards to power tosearch premises, first charge on the property of defaulters (subject to some

other charges) and prosecution for offences.

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Service-Tax on Legal Consultancy Service Compliance Guide Revised 280411

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