BEWARE OF LIABILITY TO PAY SERVICE TAX UNDER REVERSE CHARGE METHOD, WHEN SERVICE AVAILED FROM ANOTHER INDIVIDUAL ADVOCATE.
Dear Advocate Friends
Reg: Service tax payable by individual advocates in certain cases
1) As you all aware that the Legal Service is subjected to service tax levy with effect from 1.7.2012 in terms of the new provisions of Finance Act 2012.
2) The new provisions on the applicability of service tax for individual advocate are stated below:
a. For the legal service rendered by an individual advocate to any person other than “Business entity’, exemption is granted from service tax vide serial number 6 of Notification No. 12/2012 Service Tax dated 17.3.2012 (eff from 1.7.2012)
b. The Gist of serial number 6 of Notification 12/2012 Service tax, is below:
6. Services provided to any person other than a business entity by -
(a) an individual as an advocate; or
(b) a person represented on and as arbitral tribunals;
As such, For the legal service rendered by an individual advocate to a “Business entity”, no exemption has been granted and hence, service tax is applicable. However, vide Notification No. 15/2012 Service tax dated 17.3.2012 (effective from 1.7.2012), for the legal service rendered by an individual advocate to any ‘Business Entity’ , the liability of payment of service tax to Government has been shifted to the recipient of service under reverse charge mechanism.
In other words, the business entity is liable to pay service tax and not the individual advocate.
The definition of “business entity” was amended and even persons carrying out activity relating to profession would be now covered under this definition
3) Individual advocates are of the view that “No service tax liability on them”.
4) This view is partly correct and partly not correct as explained below:
a) When service rendered by an individual advocate to any person other than business entity – Full exempted – No service tax payable.
b) When service rendered by an individual advocate to business entity – No service tax liability on the individual advocate – Tax liability on the service recipient (i.e. business entity) on reverse charge mechanism.
c) When service rendered by an individual advocate to another individual advocate (say for example:- Advocate Mr Rajan request Mr Ram (another individual advocate) to appear before the Court on behalf of him and pay Rs. 20,000/- to Mr Ram as his fees), the liability of payment of service tax lies on Mr Rajan under reverse charge mechanism, considering Mr Rajan as a ‘Business Entity’ according to the definition for ‘Business Entity’ given in sub section 17 of the new Section 65B of the Amended Finance Act., 1994. Gist of the said section is below:
65B – In this Chapter, unless the context otherwise requires.
(17) “Business Entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession:
(37) “Person” includes:-
(I) an individual
(ii) a Hindu Undivided Family
(d) It can be seen from the above, the definition of ‘business entity’ covers any person carrying out any activity relating to profession also. The word profession refers to all professional including advocates.
(e) Thus, when an individual advocate Mr Ram renders service to another individual advocate Mr Rajan, the recipient of Service Mr Rajan, being a professional comes under the definition of business entity, is liable to pay service tax under reverse charge mechanism.
5) The conclusion here is “The Government is indirectly taxing the individual advocates when they receive service from another individual advocate”