Taxability of Legal Services under GST

A. Meaning of 'Legal Services':

Definition: 'Legal Services' means 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- Notification no. 12- Central Tax(CT) (Rate) dated 28.06.2017.

Analysis:

1. Legal Services can be any service which an advocate1 (including a senior advocate2)/firm of advocates provide during the course of practice.

Examples:

a. Advice or representation even before any government authority (say Municipal Corporation in relation to land dispute).
b. Monthly computations, fillings, etc in relation to Labour law (PF, ESI, etc).

2. Exemptions and other provisions in respect of Legal Services are used only in the context of 'advocates'/'firm of advocates'.

Examples:

a. A Chartered Accountant providing legal advice in relation to commercial laws though covered by definition of legal services but not considered under any reverse charge mechanism (RCM) provisions or exemption provisions.

b. Payroll consultants providing monthly payroll computations and fillings services (including PF, ESI, etc).

B. Taxability of legal services can be categorized under 3 categories viz:

1. Services which are fully exempt:

Following services are fully exempt by virtue of notification no. 9- Integrated Tax(IT) (Rate) dated 28.06.2017:

a. Legal services provided by individual advocate or partnership firm of advocates to:

i. Individual advocate or partnership firm of advocates; (Authors comment: It looks like 'individual advocate' shall also cover 'senior advocate' since there is no separate clause dealing with a case where 'individual advocate'/'firm of advocates' is providing services to a senior advocate)

ii. Any person other than a business entity3; (For ex: Legal advice provided to a retail consumer for filing consumer complaint, partition of joint family property)

iii. A business entity with an 'aggregate turnover' (T/o) up to 20 lacs (10 lacs in special category states4) in preceding financial year (FY).

b. Legal services provided by senior advocate:

i. Any person other than a business entity (Authors comment: It looks this clause shall also cover 'individual advocate'/'firm of advocates' since there is no separate clause dealing with case 'senior advocate' is providing services to a 'individual advocate'/'firm of advocates'. For ex: A 'senior advocate' rendering representation services to a 'firm of advocates' for their client);

ii. A business entity with T/o up to 20 lacs (10 lacs in special category states) in preceding FY.

2. Services which are chargeable under RCM (i.e. liability to pay tax is on the recipient and not on the supplier):

Services provided by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly to a business entity located in the taxable territory- Notification no. 10- IT (Rate) dated 28.06.2017 (read with corrigendum dated 25.09.2017).

3. Services which are chargeable under normal charge (i.e. liability to pay tax is on the 'advocate'/'firm of advocates' themselves):

If we closely look at aforesaid provisions, services provided by an individual advocate (including senior advocate) or a firm of advocates to a business entity (having T/o of more than Rs.20/10 lacs) not located in taxable territory is neither under RCM nor under exemption. Following needs to be noted:

a. This is inter-state service (as per section 7 of Integrated Goods and Services Tax (IGST) Act) and tax needs to be paid by taking registration. This taxable service can qualify (not certainly) as 'export of service' subject to qualifying conditions. For ex: Mr. X, Advocate has established legal practice in India. He provides legal advice in establishing business in India to a business entity located in Japan. Now As per section 2(6) of IGST Act, in order to qualify as export of services:

i. Supplier should be in India (Mr X is in India);

ii. Recipient should be outside India (Business Entity is in Japan);

iii. Place of supply is outside India (As per section 13 of IGST Act, it is determined to be Japan);

iv. Payment is received in convertible foreign exchange (Assuming forex is received);

v. Supplier and recipient are not 'distinct persons' (Assuming not 'distinct persons' as per explanation 1 to section 8 of IGST Act).

b. Registration in case of 'Export of Services': As per Notification no. 10/2017- IT dated 13.10.2017, if T/o of a person engaged in inter-state services is up to Rs.20/10 lacs in a FY, registration is not required. Therefore, if T/o (including turnover of export of services) is up to Rs.20/10 lacs, registration is not required. This exemption is majorly redundant due to below reasons:

i. This exemption has turnover limit.

ii. This exemption will not enable 'exporter of services' to claim refund of taxes as only a registered person can claim refund (i.e. a costly affair)- Section 16 of IGST Act:

a. Registered supplier of services can supply services without paying taxes by submitting 'letter of undertaking (LUT)' and can claim refund for taxes paid on inputs/input services;

b. Registered supplier of services can supply services by paying taxes and can claim refund for taxes paid.

C. Requirement to obtain registration:

1. As seen above in point B(3)(b) above, legal services when supplied to business entity located outside India mandatorily requires registration, subject to a single costly and redundant exception.

2. Now let us examine, registration requirement for legal services when supplied to business entity located only in India:

Legal provisions:

a. A person engaged in supply of services having turnover exceeding Rs.20 lacs shall be mandatorily required to take registration- Section 22 of Central Goods and Services Tax(CGST) Act.

b. A person engaged exclusively in supplying services wholly exempt from tax is not required to obtain registration- Section 23(1) of CGST Act.

c. A person engaged in supplying intra-state services is exempted from obtaining registration where entire tax is payable under RCM- Notification no. 5- CT dated 19.06.2017.

d. A person engaged in supplying inter-state services is mandatorily required to obtain registration- Section 24 of CGST Act. However, if T/o of a person engaged in inter-state services is up to Rs.20/10 lacs in a FY, registration is not required- Notification no. 10- IT dated 13.10.2017.

Analysis:

a. Legal Services when provided to a business entity having T/o exceeding Rs.20/10 lacs is not exempt. Even though it is under RCM but not in any case exempt.

b. Even where entire tax is payable on RCM, exemption to obtain registration is not available where a person is engaged in supply of inter-state services (since notification no. 5 is not issued/not applicable under IGST Act) except where T/o is up to Rs.20/10 lacs.

c. Sale of an old printer, furniture, etc is not exempted. Thus, liability to register can arise from other supplies also.

d. Important examples dealing with registration requirement:

i. Advocate in Delhi having turnover of Rs.50 lacs in respect of services provided to his clients (t/o>20 lacs of each client) located in Delhi/Haryana/Uttar Pradesh shall be mandatorily required to take registration even when all services are taxable under RCM since notification no.5- CT is not applicable in respect of inter-state services. Section 24 shall apply in this case.

ii. In the above example, if all clients are located in Delhi, then registration is not required basis notification no. 5.

iii. In first example, if additionally there is sale of old printer turnover of which is Rs.2 lacs, registration shall be required since section 22 shall apply. Section 23 and notification no. 5 shall not apply.

iv. Advocate in Chennai having legal services turnover of Rs.19 lacs and turnover of Rs.2 lacs in respect of sale of old printer shall be mandatorily required to take registration since turnover exceeds Rs.20 lacs. Section 22 shall apply in this case and section 23 shall not apply since sale of printer is not exempt/under RCM.

Summing up: Registration is not required in below cases (Registration is required in every other case):

a. Total Turnover of services is up to Rs.20 lacs (Whether intra-state or inter-state).
b. Irrespective of amount of turnover, if entire turnover is in respect of intra-state services.
c. Irrespective of amount of turnover, if entire turnover is in respect of fully exempt services.

D. Let we analyze registration provisions by way of a matrix:

E. Other provisions:

1. Cancellation of Voluntary Registration: Application for cancellation of voluntary registration can be made in form GST REG-16. Earlier requirement of waiting period of 1 year from effective date of registration has been done away by notification no. 3- CT dated 23.01.2018.

2. Furnishing of Return: A registered 'advocate'/'firm of advocates' providing legal services needs to furnish all applicable returns/statements i.e. GSTR-1, 2, 3, 3B, etc on or before relevant due dates.

3. J K Mittal & Company vs. Union of India (W.P.(C) 5709/2017 & CM No. 23814/2017), Delhi HC: Judgment of the case states that no coercive action can be taken against any 'advocate' or 'firm of advocates' till government clarify its stand in relation to taxability or issues relevant notifications exempting 'advocate'/'firm of advocates' from obtaining registration.

Even when government has issued various clarifications/notifications/corrigendum in response to court order, but as on date, advocate/'firm of advocate' are not exempt taking registration under GST law.

1 'Advocate' has the same meaning as assigned to it in clause (a) of sub-section (1) of section 2 of the Advocates Act, 1961.

2 'Senior Advocate' has the same meaning as assigned to it in section 16 of the Advocates Act, 1961.

3 'Business Entity' means any person carrying out any business.

4 Total 10 states i.e. 7 North east states and 3 other states i.e. Sikkim, Uttarakhand, Himachal Pradesh.

The author can also be reached at ca.shivashish@gmail.com

No part of this article shall be reproduced, copied in any material form (including e-medium) without written permission of CA. Shivashish Kumar. The information provided is not a substitute for legal and other professional advice. This is only for academic discussions.