This article deals with the tax treatment proposed to be accorded to Senior Advocates under the Goods and Services Tax (‘GST’) regime. It also seeks to provide an overview of the manner in which service tax was levied on Senior Advocates under the previous tax regime and its comparison with the impending GST regime, along with the impact on recipient/client companies.

Genesis of service tax on legal services

In Roscoe Pound’s words, the ideas involved behind a respectable profession are “Organisation, learning, and a spirit of public service, the remaining idea, that of gaining a livelihood, is incidental.” The legal profession was traditionally perceived to be imbued with such nobility so as to occupy a pedestal above a mere profession or economic activity and the indirect tax laws applicable on provision of services used to reflect the aforesaid perception, at least in India.

However, in the present day and age – where the lawmakers have extended the tentacles of tax to all spheres of economic activity – the Finance Act, 2009 imposed service tax on legal services, whereby the new taxable category of ‘legal consultancy services’ was introduced.

At this stage, appearances before Courts, Tribunals and any other adjudicating authority were kept outside the taxable category. However, soon afterwards, vide the Finance Act, 2011, services by way of representation before the judicial authorities were also brought within the tax net.

The said amendment was challenged on the basis that it goes against the very Preamble of the Constitution which seeks to ensure justice to all citizens. In addition it creates financial burden on individuals approaching the Courts seeking legal remedies.  The levy was also challenged on the grounds that there existed no profit element in the transaction between the lawyer and the litigant so as to classify the former as a service provider and the latter as a service recipient. High Courts across the country adopted varying views, and the matter lies pending before the Supreme Court today.

Meanwhile, the service tax law underwent a significant change from 2012 onwards by moving to a negative list based regime, whereby except for a handful of services, the rest were brought within the tax net.

Treatment of ‘Advocacy Services’ under the Negative List regime

Along with the introduction of the Negative List Regime in 2012, the Central Government provided for a specific exemption for legal services provided by an individual advocate or a partnership firm of advocates to a certain class of people. In cases where there was no exemption, the liability of paying service tax was imposed on a reverse charge basis i.e. liability was upon the service recipient/client.

Introduction of a separate taxable category for Senior Advocates under the Service Tax regime

It was only in 2016, that for the first time, a separate taxable category for ‘senior advocates’ was introduced, treating them as a class distinct from other legal service providers like individual lawyers or a firm of lawyers. The upshot of this change was that unlike individual advocates or law firms, the liability to pay service tax was imposed upon Senior Advocates on a forward charge basis i.e. the liability to pay the tax lay upon the Senior Advocate and not on the service recipient i.e. the client.

Predictably, the above changes sparked another round of debate within the legal fraternity with arguments being advanced over the arbitrary manner in which the liability of Senior Advocates was affixed on a forward charge basis, while law firms continued to be governed under the reverse charge tax regime.

It was also argued that the placing of law firms under the reverse charge mechanism was adding to their cost structure as they could not claim CENVAT credit on the input service tax paid, which was not the case with Senior Advocates. The lack of an intelligible differentia between the two categories of advocates was the primary reason behind the stay granted by the Hon’ble High Courts of Gujarat and Delhi on the operation of changes introduced vis-à-vis the taxability of Senior Advocates.

Probably realizing the extent of the opposition, the Central Government made further changes via a flurry of notifications. These changes include making reverse charge applicable to a Senior Advocate who is rendering service to a business entity with a turnover of more than Rs. 10 lakh, while services for all other classes of persons stood excluded from the taxable net.

Given the foregoing, in general, Senior Advocates did not obtain registration under service tax laws.

With this background, let us now understand the treatment accorded under the GST regime to services rendered by Senior Advocates.

Tax treatment of ‘Senior Advocates’ under the GST regime

The Central Goods and Service Tax Act, 2017 (hereinafter “the CGST Act”) (along with other GST legislations) has been enacted to subsume all the multifarious indirect taxes into a single levy. Section 7 of the CGST Act provides for the charging section whereby the expression “supply” has been deemed to include all forms of supply of goods or services or both for a consideration and in furtherance of a business.

In general, the essential ingredients to determine whether a supply of service is taking place is to determine whether services have been rendered in lieu of a consideration and the same has been performed in furtherance of business activities.

Under the powers vested under Article 279A of the Indian Constitution, the GST Council finalized its recommendations on the GST rates for services including the exemptions to be carried forward from the previous regime.

In this regard, it would be worth noting that exemption from payment of GST has been extended to Senior Advocates rendering legal services to any person other than a business entity and in the case of business entities, the exemption extends to business entities with a turnover of up to INR 20 lakhs (in the case of general category States) and INR 10 lakhs (in the case of special category States like the north-eastern States).

This would imply that the following services provided by a Senior Advocate do not fall under the exempt category:

1. Services rendered to a business entity having a turnover of more than 20 lakh (more than 10 lakh in case of special category states)
2. Services rendered to a firm of advocates.

Further, the GST Council has maintained status quo for individual advocates/firm of advocates, recommending 100% reverse charge mechanism in case of legal services rendered (subject to exemptions) i.e. the entire tax burden would be borne by the service recipient/ client.

Even without a special mention of Senior Advocates as a separate category in the reverse charge list, in light of the latest position under service tax it can be inferred that under the list of ‘reverse charge category of services’ as approved by the GST Council, services provided by an ‘individual advocate’ includes the services of a ‘Senior Advocate’ which would mean that even the services provided by Senior Advocates would be chargeable under the reverse charge category.

The above inference is supported by an important announcement in the 16^th meeting of the GST Council – the exemption from registration for individual advocates specifically including Senior Advocates.

Pursuant to this, a formal notification [Notification No. 5/2017 – Central Tax; dated 19th June, 2017] has been issued, providing exemption from registration for “persons who are only engaged in making supplies of taxable goods or services or both, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services or both”.

Given that all legal services (whether by a law firm or individual lawyers including Senior Advocates) will be liable to reverse charge GST, and (presumably) and all law firms/individual lawyers are only providing legal services (and thus have no other output GST liability of their own) – they would all be exempt from registration under GST. Thus, Senior Advocates will neither be liable to register under GST nor be liable to pay GST in any other manner on the legal services rendered by him.

Concluding Comments

• Senior advocates will neither be liable to register under GST nor be liable to pay GST in any other manner on the legal services rendered by him.
• For companies who are engaging services of Senior Advocates (through individual lawyers/Firms as briefing counsels), such procurement of legal services will qualify as ‘procurement from unregistered vendors’ and thus such recipient companies will need to raise a self-invoice for the amount being charged by such Senior Advocates, upload the same in the GST network (“GSTN”) and pay GST on reverse charge.
• Such recipient companies would need to bear 18% GST (as opposed to the current 15% service tax) on a reverse charge basis post July 1.
• For such recipient companies, it may be a good idea to clear pending invoices from May/June 2017 of such Senior Advocates before July 1 so that the reverse charge tax liability on that remains at 15% – payment of such invoices post July 1 may attract 18% GST, an additional 3% tax.

Authored by Pragya Awasthi (Senior Associate, Advaita Legal) and Raghunath Seshadri (Senior Associate, Advaita Legal), with inputs from Sudipta Bhattacharjee (Partner, Advaita Legal)