Guide To Service-tax On Advocates From 1.07.2012 Onwards

The Finance Act, 2012 has made paradigm shift in levy of service tax from selective list of taxable services to all encompassing activities except the exclusions from definition of service, Negative list and Exemptions provided in the exemption notification. However, the Government has exempted service by an individual advocate or a partnership firm of advocates (Notification No. 25/2012 – ST dtd. 20.06.2012) by way of legal services to,

i) an advocate or partnership firm of advocates providing legal services;
ii) any person other than a business entity; or
iii) a business entity with a turnover upto Rs. 10 Lakhs in the preceding financial year.

“Legal service” is defined to mean any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.

“Business entity” is defined to mean any person ordinarily carrying out any activity relating to industry, commerce or any other business.

In respect of services provided by an individual advocate or a firm of advocates by way of legal service to a business entity located in taxable territory, such business entity is liable to whole of service tax (Notification No. 30/2012 – ST dtd. 20.06.2012) under reverse charge.

Thus, the individual advocates or a partnership firm of advocates providing legal service are not liable to pay service tax under any circumstance and in case of service provided to the business entities having turnover above Rs. 10 Lakhs in the preceding financial year, such business entities are only liable to pay tax. However, for legal service provided or agreed to be provided to business entities located outside India where place of provision of service is within the taxable territory (As determined under Place of Provision of Service Rules, 2012 (‘PPSR’ for brevity)), the advocate or firm of advocates is liable to pay tax.

For example, an advocate or firm of advocates gives report on title of landed property situated in India to a business entity having turnover of above Rs 10 lakhs in the pervious financial year. In this case, place provision of service is within the taxable territory (Rule 5 of PPSR) & the receiver of service is located outside India. The service is not an exempt service & reverse charge cannot be applied and therefore the advocate or firm of advocate is liable to pay the tax which he may recover from service recipient.

Location of service receiver is defined in PPSR as either, a) where the service provider is registered or, b) if he is not so registered, the location of his business establishment or if the service is used at a place other than the business establishment, a fixed establishment where service is used, or in absence of such places, the usual place of residence of recipient of service (usual place of residence in case of a body corporate is place of its incorporation). Location of service provider is also defined in the same manner in PPSR.

The above provisions applies only to advocates (defined to have meaning assigned to it in S.2(1)(a) of the Advocates Act, 1961) and not other persons like sale tax practitioners, income tax practitioners or even graduates who may be providing assistance in preparation of returns, representation before the authorities etc., as covered under legal service defined above.

Point of Taxation and rate of tax in relation to eight specified categories for service provided prior to 1.04.2012:

The provision contained in Rule 7 of Point of Taxation Rules providing for payment of service tax on receipt basis in the following cases are omitted, effective from 1.04.2012:

i. Consulting Engineer’s Service
ii. Practicing Chartered Accountant’s Service
iii. Practicing Company Secretary’s Service
iv. Cost and Works Accountant’s Service
v. Legal Service
vi. Technical & Scientific Consultancy Service
vii. Architect’s Service
viii. Interior Decorator’s Service

In relation to service provided upto 31.03.2012 but the payment not received, the liability shall be on the basis of receipt of payment. This is because S. 38A of the Central Excise Act, 1944, which is made applicable to service tax provides, interalia that repealment, amendment, supersession or rescind of any rule, notification or order shall not affect any right, privilege, obligation or liability acquired, accrued or incurred under such rule. The CBEC Circular No. 154/5/2012 – ST dtd. 23.03.2012 also clarifies this. Therefore, these service providers for the service provided upto 31.03.2012, without any turnover limitation shall be liable to pay service tax on receipt of payment only.

The rate of tax applicable to these service providers however, shall be the rate applicable from 1.04.2012 i.e. 12% plus applicable Education Cesses as R.7 of POTR was a non-obstante clause. This has been also confirmed by CBEC Cir. No. 158/9/2012 – ST dtd. 08.05.2012.

All service providers including the above categories of service providers whose turnover of taxable services in the previous financial year exceeds Rs. 50 lakhs, would be liable to pay service tax on accrual basis for service provided from 1.04.2012 onwards.

Individuals or Partnerships whose aggregate turnover of taxable service is upto Rs. 50 lakhs in the previous financial year:

A proviso to R.6 of Service tax Rules, 1994, is added from 1.07.2012 which gives an option to such individuals or partnerships to pay tax on taxable services provided or agreed to be provided upto total of Rs.50 lakhs in the current financial year on the basis of receipt of payment. In view of this amendment, such assesses who provide any taxable service (distinction between the taxable services is blurred now in the negative list regime) may opt to pay service tax on receipt basis for service provided from 1.07.2012. Needless to say that, such persons (barring above eight categories) shall continue to pay service tax on accrual basis for the period 1.04.2012 to 30.06.2012.

Liability to pay service tax under Reverse charge by a Business entity of advocates:

1. Services provided by the Government

a. Services by department of post, by way of speed post, express parcel post;
b. Transport of goods or passengers;
c. Support Services like renting of immovable property, etc.

(“Support service” is defined to mean infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis)

2. In respect of any taxable service provided or agreed to be provided by any person who is located in non-taxable territory and received by any person located in taxable territory.

3. Service received from a goods transport agency in relation to transportation of goods by road when the freight is paid by such person.

Note:- No basic exemption is allowable to the person who pay service tax on Reverse charge basis. This means that the recipient of service would be liable to pay tax in above circumstances even for a small amount of say Rs. 100/- of tax and for this purpose he has to get register with the service tax authorities and comply with other provisions like filing of returns, etc. However, rules are framed to allow refund of service tax paid on input services used for such payment.