SILF asks Govt of India to do a rethink on service tax on law firms Alleges unhealthy discrimination between law firms and individual advocates

The Society of Indian Law Firms (SILF) has submitted a representation before the Central Board of Excise and Customs with respect to the proposals to impose a service tax on “legal consultancy services” in the Finance Bill of 2012 as well several other notifications. SILF alleges that the proposed changes reflect an “unhealthy discrimination” between individual advocates and law firms.

The Society of Indian Law Firms (SILF) has submitted a representation before the Central Board of Excise and Customs with respect to the proposals to impose a service tax on “legal consultancy services” in the Finance Bill of 2012 as well several other notifications. SILF alleges that the proposed changes reflect an “unhealthy discrimination” between individual advocates and law firms.

The five-page representation (a copy of which can be viewed below) states that after Notification No.3/2012-ST dated March 17, 2012 comes into force, legal consultancy service providers with a turnover in excess of Rs.50 lakhs in the financial year 2011-12, will be “mandatorily required to pay service tax on the raising of invoice or receipt of payment, whichever is earlier, with effect from April 1, 2012.

The representation also argues that the benefit Notification No. 15/2012-ST dated March 17, 2012 (which allows the tax liability on services provided by individual lawyers to a business entity to be shifted entirely to the service recipient) has not been extended to a partnership firm “practicing legal profession.”

The two arguments raised by SILF are as follows:

(i)  "Legal services rendered by a partnership firm of advocates to non-business entities will be ex-facie more costlier by the applicable rate of service tax vis-à-vis such services rendered by an individual advocate.

(ii)  No two or more advocates would like to collaborate for providing effective legal services as such collaboration would not only require working capital for payment of service tax but may also end up paying the same from their pocket even if the bills are not honoured by the client.”

The representation goes on to say that “there are no plausible or cogent reasons for such discrimination” between law firms and individual advocates. It is further stated that such discrimination is not only absent in the Advocates Act,1961 but in the Income Tax Act,1961 as well. SILF submits that “Therefore, this distinction which is sought to be created in the service tax treatment against the same class of service providers, merely based on constitution, is likely to transgress constitutional provisions too.”

Speaking to Bar & Bench, SILF Chairman Lalit Bhasin said that “The entire concept of levying service tax on lawyers is misconceived - lawyers are a part of the constitutional set up of administration of justice. Artificial division of legal profession between those who appear in courts and those who do corporate work is most arbitrary and unreasonable.”

SILF’s representation is not purely adversarial though. In the latter half of the letter, SILF offers four proposals for the “benefit of the legal profession, at large.” These proposals include continuing the present system of taxation wherein firms providing legal services pay tax on receipt basis until the implementation of the negative list regime; the benefits of Notification No.12/2012-ST and Notification No. 15/2012-ST be amended to include law firms as well and that services rendered by an individual advocate/professional to a law firm be billed to the service recipient.

It will be interesting to note the Government’s reaction to this representation in the days that come. The debate over imposition of service tax on law firms is certainly not a recent development. Back in 2011, as reported by Bar & Bench SILF had asked the Finance Minister to roll back the imposition of service tax on law firms on the ground that it was discriminatory.

SILF's Representation