Firms with a turnover of over ?10 lakh who go in for arbitration proceedings will be liable to pay service tax at the rate of 14 per cent.

“The services provided or agreed to be provided by an arbitral tribunal to a business entity (turnover exceeding ?10 lakh)… is taxable under reverse charge mechanism and recipient of service is liable to discharge service tax liability,” said the Central Board of Excise and Customs in a new clarification after doubts arose over who would pay the service tax.

As part of efforts to broaden the tax base, Finance Minister Arun Jaitley had in the Union Budget 2016-17 included the services provided by “a senior advocate to an advocate or partnership firm of advocates providing legal service” and “a person represented on an arbitral tribunal to an arbitral tribunal” within the ambit of service tax. These are now taxed at 14 per cent from April 1, 2016.

However, with firms paying hefty fees to arbitrators and tribunals, the question of who would pay the service tax arose.

The CBEC noted that the concept of “forward charge mechanism” or payment of the tax by the service provider does not apply in this case and is not the correct interpretation of law.

“Services are provided or agreed to be provided by the panel of arbitrators, as comprising the several natural persons on the said panel, to the business entity or to the arbitration institution approached by the business entity for purposes of arbitration,” it said.

The CBEC, however, said that the services provided by an arbitral tribunal to any person other than a business entity and a business entity with a turnover up to ?10 lakh in the preceding financial year are exempt from service tax.