Jaitley’s #Budget2016 asks senior advocates to pay 14% service tax (and why it may just work)

Among the far-reaching implications included in this year’s Union Budget is a provision that affects a small but significant number of the country’s tax-paying population: lawyers..As pointed out by Sowmya Rao, Finance Minister Arun Jaitley has evinced a keen interest on taxing services provided by senior advocates. Nestled in a table on page 50 of this document, lies a proposal to withdraw the service tax exemption currently offered, and levy a 14% service tax from the first of this month..This tax is to be levied on:.Services provided by a senior advocate to an advocate or a law firmServices provided by an arbitrator to an arbitration tribunal.Expectedly, there are some who are not too happy with this proposal.Sujit Ghosh, Partner at Advaita Legal, argued that this is an extremely arbitrary proceeding as far as law firms are concerned. He says that, effectively, the proposal keeps senior advocates in a “forward charge service tax regime” i.e. the senior advocate pays the tax, while law firms continue to be in a “reverse charge” tax regime i.e. the tax component is paid by the client..He says,.“Typically, the entire concept of reverse charge was introduced, where the Service provider is either under the unorganized sector or is generally outside the tax jurisdiction. Where however the service provider comes within the organized sector, it creates unwarranted sub classification and tax distortion and tax cascading, to keep these law firms in the reverse charge mechanism. The result of such reverse charge mechanism for the law firms is incremental tax cost, which is not creditable.” .Ghosh suggests that instead, law firms above a certain turnover are placed in the forward charge basis..“This would help them claim Cenvat credit of input service tax and therefore, reduce cost and avoid tax cascading in the entire chain. Under this option, solo practitioners (ie individual lawyers as also Senior Advocates) may be kept outside the forward charge mechanism and continued to be kept in the reverse charge mechanism.” .So is Jaitley’s proposal to meet strong opposition from the legal community? Ghosh, for one, hints that there certainly are grounds for challenge..“One wonders, if equality principles stands vitiated by keeping the Senior Advocates in the forward service tax regime and the individual lawyers in a reverse charge mechanism – is there a intelligible differentia at all one wonders.”.Shreya Rao, founder at Law Offices of Shreya Rao, is not so sure. While admitting that it is illogical to impose different regimes (i.e. a reverse charge in one case and regular charge in another), this may not be sufficient to successfully challenge the levy under Article 14, particularly since the tax is ultimately passed on to the same client in both cases..If it were to be challenged though, it would not be the first time that service tax on lawyers has resulted in litigation..In 2011 the addition of sub-clause (zzzzm) of clause (105) to Section 65 of the Finance Act, 1994 led to much litigation. This provision levied service tax on fees paid to lawyers. Predictably, Bar associations across the country challenged this clause, with the matter eventually reaching the Supreme Court..In August of 2015, the apex court delivered a significant order. With senior counsel KK Venugopal appearing for the Bombay Bar Association, the Supreme Court decided to tag all pending litigations, while also staying the Bombay High Court’s dismissal of the BBA’s challenge to the imposition of service tax..Nonetheless, the current proposal by Finance Minister Jatiley, who is a senior counsel himself, may just slip through without too much opposition. By limiting service tax to just senior advocates, Jaitley may be banking on little, if any, opposition from the legal community.