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Lawyers try to come to terms with service tax
August, 31st 2012

The finance ministrys latest concession on service tax imposed on lawyers that was notified in June has been welcomed by some; others continue to say it wasnt enough and many remained unaware of the current law and how, or if at all, they had to pay this tax.

It all started in the governments 2009-10 budget, when it announced that law firms would have to pay service tax, explicitly exempting individual advocates representing clients before the courts.

The Bar Council of India (BCI) spoke out in favour of taxing law firms at the time. The Society of Indian Law Firms (SILF) was less pleased and took the Union government to court while lobbying the finance minister.

Dissenting voice: Some legal experts say they remain opposed to the principle of service tax being payable at all. Photo: Pradeep Gaur/Mint
Advocates associations such as the Supreme Court Bar Association (SCBA) showed solidarity with the law firm lawyers, and the Delhi High Court Bar Association (DHCBA) even went on strike in protest for its brethren.
Next year, on 28 February 2011, the service tax net widened and also included individual advocates advising businesses. SILF filed a second writ petition after the first court case against the tax was dismissed.

SILF and other lawyers continued their lobbying efforts, while the DHCBA held another strike against the service tax.

Lalit Bhasin, chairman of SILF, explained one particular bugbear in the regime, whereby lawyers would have to pay the service tax to the taxman as soon as the lawyer issued the invoice to the client. We met the then finance minister Mr Pranab Mukherjee and told him that it is very difficult for us to pay service tax on the basis that our invoices may not be honoured, said Bhasin.

As often, client bill payments are delayed. If youve already paid service tax based on the bills youve already sent out, and the bills get cleared later in the year, or even in the next financial year, its a huge headache to keep track of whether youve paid taxes in excess or not, said one Delhi advocate about the previous rules.

In a 31 March 2011 notification the finance ministry gave lawyers that concession and made service tax payable by the recipient of the service and not by the lawyer. This reversal of service tax collectionseparating the payment of tax from the service providerone notable case where this had been done before was for transport services, after drivers and transport operators went on strike, lobbied and filed in court.

Even today, however, some lawyers appear to misunderstand the implication of those rules. One Delhi high court advocate stated wrongly: Suppose a lawyer is dealing with a client that is a corporate client, (service tax) is payable by the client but has to be collected by the lawyer.

Still other problems persisted. By a strange twist of the service tax regime, the pay of every single lawyer on full-time and exclusive retainer for a law firm, was also subject to service tax, said Majmudar and Partners managing partner Akil Hirani.

Law firms dealt with the issue in a variety of ways, said Milan Chitalia, a partner at Mumbai-based accounting firm NPV and Associates, which advises a number of lawyers. One law firm told its associates to register and pay the service tax directly but that it would later reimburse them, while at another only the fees charged by associates in the litigation department were subject to service tax, he said.

On 29 April 2011, the Delhi high court then stayed the operation of service tax in the DHCBAs petition, which was followed by the Andhra Pradesh and Gauhati high courts also ordering interim stays on the operation of the tax in May.

On 20 June, after the March 2012 budget muddied the situation even further, the government finally came out with service tax rules for lawyers that were at least consistent (see box), though they are still not universally loved.
The new rules fix the problem of lawyers who are quasi-employees having to pay service tax within their firm by restricting service tax primarily to advice provided by lawyers to businesses but not individuals. The rules also intend that fees charged by an advocate appearing in court when instructed and paid by a law firm would not have to charge service tax again. But even those rules are not clear to everyone. If a lawyer is briefed by a law firm, I have to collect the service tax from them? the Delhi high court advocate said, guessing incorrectly at the current position.

Law firms have mostly consigned themselves to the new service tax realities. In a way its good, commented Hirani about the changes, although law firm profits would be reduced. Because the client was now collecting the service tax rather than the law firm, the firm could not use the tax credits anymore to set off service tax payments made by firms to their service providers.

However, when advising foreign companies, under export of service rules in most cases, the Indian lawyer would again have to become a tax collector and pay the service tax to the revenue when the invoice is raised.

So is the treatment of foreign companies for the purpose of the tax a problem for law firms? Not really, said Bhasin. One is reconciled to this, that service tax has to be paid.

Things are also uncertain, claimed Chitalia, with respect to corporate lawyers who are doing non-legal work, such as company incorporation, fund raising or transaction structuring within a law firm. He said that those services, which are not legal in nature, could very well be taxable when provided to the law firm.

DHCBA president Amarjit Singh Chandhiok , who is also an additional solicitor general of India, said that he and the DHCBA remained opposed to the principle of service tax being payable at all. We are not happy with the situation because in this country the constitution provides justice for everybody so you cant tax the justice delivery systems.

The lawyer is not rendering a service but is assisting the court in rendering justice.

While the Delhi high court stay order is still in effect, it doesnt apply to the current financial year, he said, and the new laws have not yet been examined by a court. The contentious issue therefore remains, and the DHCBA has sent representations to the government to resolve the problem. When you can exempt doctors, said Chandhiok, I am sure you can exempt lawyers.

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