The Society of Indian Law Firms (SILF) has filed a writ in the Bombay High Court against the most recent Union Budget's service tax on law firms, contesting its rationality and constitutional grounds.
The writ claims that the tax violates the Constitution of India's Articles 19(1)(c) and 14 – the right of citizens to form associations or unions and equality before law, respectively.
SILF is seeking a writ of mandamus in respect of the Finance (No.2) Act 2009 in respect of the law firm service tax.
The organisation hopes to restrain the Government from implementing the tax and wants to prohibit it from taking any "coercive steps or actions" against the petitioners until the "final disposal of the petition".
The 2009-10 Union Budget proposed on 6 July that a 10 per cent service tax would be payable on legal advice rendered by lawyers working in law firms but not on individual advocates or court appearances.
In the writ now filed SILF claims that differentiating between law firms and individual advocates under the service tax is "arbitrary, unintelligible, unreasonable, discriminatory and has no rational nexus to the object sought to be achieved".
"Such a classification creates a hostile discrimination between advocates as a class in itself," adds the writ.
Practising lawyers reacted with outrage when the service tax was first introduced in July and litigating lawyers striked in Delhi and Lucknow High Courts protesting the new tax.
Legally India reported at the time that SILF was considering legal action if other efforts to lobby against the service tax proved fruitless.
It is understood that SILF committee members and law firm managing partners Lalit Bhasin, Rajiv Luthra, Jyoti Sagar and Cyril Shroff were instrumental in encouraging SILF to bring the claim.
The writ listed as Society of Indian Law Firms and 2 ors. vs Union Of India and 3 ors. was registered on 21 November in the Bombay High Court.
Click here for a detailed list of the grounds.
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Law firms are an easier target for the government so they have brought them into the service tax net. The only reason they have kept individual practitioners out is because they will have thousands of striking lawyers on the streets if they try and make them do anything differently from what they are doing at present.
In my understanding, Service Tax is a mode for raising revenue. In so far as legal services are concerned, instead of requiring lawyers/law firms to collect and deposit the tax, a mechanism could be developed whereby corporate clients would be obliged to pay the tax component and deposit the same with the tax authorities. This would release the law firms from the service tax net and also not affect the government revenue.
diverse elements in the field of tax, the legislature is permitted a large
discretion in the matter of classification to determine not only what should be
taxed but also the manner in which the tax may be imposed. Courts are extremely
circumspect in questioning the reasonability of such classification but after a
"judicial generosity is extended to legislative wisdom, if there is writ on the
statute perversity, madness in the method or gross disparity, judicial
credibility may snap and the measure may meet with its funeral". (Vide: Ganga
Sugar Corporation vs. State of U.P. )
The same judicial wariness was expressed in Federation of Hotel and
Restaurant Association of India etc. v. Union of India & Ors., (1989) 3 SCC 634
where it was said:
"It is now well settled that though taxing laws are not outside Article 14,
however, having regard to the wide variety of diverse economic criteria that go
into the formulation of a fiscal policy legislature enjoys a wide latitude in
the matter of selection of persons, subject matter, events etc., for taxation.
The tests of the vice of discrimination in a taxing law are, accordingly, less
rigorous. In
examining the allegations of a hostile,
discriminatory treatment what is looked into is not its phraseology, but the
real effect of its provisions. A legislature does not, as an old saying goes,
have to tax everything in order to be able to tax something. If there is
equality and uniformity within each group, the law would not be discriminatory.
As far as the Indian legal industry is concerned, it is early days yet - one needs to wait and watch how this impacts consumption patterns amongst users of legal services, and also how it affects the legal sector as a whole.
The only net result is that litigation is going to be more expensive - by at least 10.3%.
While we can debate on these issues - does it really matter to the Government. They don't care.
All the best to SILF and hope it succeeds.
At present it appears to be (b), as most of the grounds are oriented to dispute the difference between lawyers and law firms. If the court agrees, the litigators would also come within the service tax net, unless the service tax itself is either held unconstitutional or ultra virus the Finance Act [under (a)]. I don’t see substantial grounds raised by the petitioners on (a), or in other words, to challenge classification of practice of law as “service”, its being beyond the scope and powers of the Central Government, etc.
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