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CBEC to move SC against stay on service tax on lawyers
April, 13th 2016

The Central Board of Excise and Customs (CBEC) has decided to move the Supreme Court to vacate the stay granted by the Gujarat, Delhi and, more recently, Calcutta high courts on levy of service tax on legal services provided by senior advocates to other advocates and law firms.

The CBEC chairperson has directed that the Attorney General be engaged for filing a transfer petition in the Supreme Court against the high court orders. A letter, dated April 8, has been sent to chief commissioners (service tax) of Delhi, Gujarat and Calcutta, instructing that they urgently send all the relevant documents to the legal cell of the CBEC to enable the filing of the petition.

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It may be noted that no service tax is levied on legal services provided to individuals or to business entities having a turnover of less than Rs 10 lakh.

The Finance Bill (Budget 2016) tabled in Parliament on February 29 has proposed withdrawing the service tax exemption on services provided by senior advocates to other individual advocates or law firms, from April 1, 2016. Senior advocates are typically engaged by other individual advocates or law firms, especially in complex matters. Consequently, the levy of service tax of 15% (including cess) would hike the legal costs where senior advocates are involved. The Budget also proposed that in respect of fees of senior advocates, the service tax would be levied under a forward charge mechanism (the tax would be collected and deposited by the senior advocate).

Not happy with the proposal, petitions were filed by senior advocates and bar associations before various high courts, of which three have granted a stay. The main argument of the petitioners was that introduction of service tax on legal fees of senior advocates was unconstitutional. Another key argument was that individual advocates and law firms who engage the services of senior advocates cannot avail CENVAT (input tax) credit in respect of the service tax component included by senior advocates in their professional fees, which would result in double taxation.

The 2016 Budget isn't the first time that a service tax on legal fees has been introduced. It was first introduced in a limited manner in September 1, 2009. Later, in July 2012, a 'reverse charge mechanism' was introduced. Under this, business entities with a turnover of Rs 10 lakh or more had to pay service tax and also deposit the same against the legal fees paid to individual lawyers or law firms.The 2016 Budget has only removed the service tax exemption enjoyed by senior advocates in respect of legal services provided by them to others in the legal profession — other practising advocates or law firms (see graphic).

According to an EY communique, while the Budget proposal appears to be in line with the government's intent to prune the exemptions under the proposed GST regime, the forward charge for service tax levy triggered the challenge on constitutional validity.

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