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Budget unlikely to change lawyers' fortunes

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"They say it's going to be a best-selling political thriller with hero called Recovery and a villain called Deficit" said a Times of India caricature about the ongoing Budget session. Meanwhile, indirect and direct tax practitioners have their eyes firmly on service tax, Goods and Services Tax (GST) and the Direct Tax Code (DTC) as issues that will concern the legal community.

LexCounsel partner Alishan Naqvee says: "I don't think the budget will bode well for lawyers."

Luthra & Luthra direct tax partner S R Patnaik predicts: "I don't think there will be anything specific for lawyers in this year's budget."

Indirect tax lawyer Puneet Agrawal, partner, Athena Law Associates feels that the Government is likely to hike rates as a regular fiscal policy measure to earn revenues. "Also, presumptively - more services might be brought within the service tax net," he adds.

Service Tax
Central excise and service tax rates may be increased to 10 per cent and 12 per cent respectively, in a bid to revise concessions of last budget.

While not expecting any favourable treatment, the least lawyers expect from the budget is greater clarity on the applicability of service tax rules, which in its current form is riddled with ambiguity.

"Indirect taxes are meant to be passed on. The fees of lawyers will also go up if there is an increase in rate of service tax payable, which can go up to 12 per cent but is not likely to go beyond. It is now 10 per cent plus cess, 10.3 per cent precisely," notes Agrawal.

Naqvee seeks resolution of the difference between proprietorship firms being exempted and law firms not exempt under service tax. "I'm not for including all of them [individual practitioners], but for excluding law firms under the tax net in general or at least in specific cases," he notes.

"If we're rendering legal services to clients outside India, which is more of an opinion work implying that the client is not essentially using the services here, then non-applicability of service tax would be a contentious issue," he adds. "Convincing the Service Tax Department on exemptions is always difficult, more so when we would advise on Indian laws."

Another matter Naqvee hopes for the budget to consider is a grant of clear exemptions to law firms whose work for clients outside India fetches foreign exchange.

"A lot of exemptions are given to services rendered out of India - most of the services that are exported - services to the IT sector, LPO's are exempted from tax and they get income tax benefits also. Similar exemptions to law firms' foreign exchange earnings would help."

GST
There is little doubt in the minds of lawyers about the Government's failure to introduce GST from 1 April 2010 as proposed, but confusion over its implementation in the absence of clear policy guidelines evoked criticism.   

Agrawal comments: "Any observations about GST in the budget would only be a part of the speech. I doubt they will announce legislative changes.

"I don't expect too much from GST at least from an operational perspective, it may even make things worse. For example, a CA [chartered accountant] who has to file service tax with the Service Tax Authority (which comes under Central Government) will have to deal with dual authorities after the introduction of GST - i.e. both at the state and central level," Agrawal explains and adds: "No clarity, whatsoever."

"Bringing in GST is entering into a whole new debate," claims Naqvee. "It will throw up its own problems and challenges while we're still grappling with the interpretation of service tax as far as lawyers are concerned and we need to find justification on many aspects which we're unable to find."

Direct Tax Code
The new Tax Code which has been open to public debate since inception hopes to replace the existing Income Tax Act starting from 1 April 2011.

"The Direct Tax Code (DTC) can't be implemented for sure by 1 April 2010 because it is not even being put forth before the parliament," observes Patnaik.

"In my personal opinion, the change from the IT Act to DTC should happen in a gradual, structured and phased manner. DTC will totally substitute the IT act; it's a completely new regime. Even though most principles are the same with no conceptual changes, but at the same time quite a few significant changes have been proposed."

There is uncertainty if DTC will come into legislation in its original form. A lot of questions are unanswered about what changes, if any, the new act will carry.  

"The impact of new provisions could be severe in some aspects," predicts Patnaik.

"If you look at the FDI regime, it does provide that there won't be any distinction between long term and short term capital gains, also in the letter in law principle put forth in DTC. There is a little bit of ambiguity about what will happen to various treaties India has signed with other countries whether DTC will be subject to provisions of treaties or not. Similarly, tax on long term capital gain will have far reaching changes that will have a significant impact on the economy as well."    

Patnaik added that imposition of Minimum Alternate Tax (MAT) on the gross value of assets rather than a profit based tax in the infrastructure sector for example could kill projects before they start. If one were to pay a quantifiable percentage of the project value one could end up paying as tax which the project will never earn as profits.

The direct tax code seeks to simplify the current tax provisions. It aspires to be a vast improvement over Income Tax Act 1961.

To moderate the tax rate and simplify tax laws, all direct taxes would be brought under one code. The new code is aimed at eliminating the scope of litigation as far as possible.

In the foreward to the Tax Code Finance Minister Pranab Mukherjee explains that the aim is to eliminate distortions in the tax structure, introduce moderate levels of taxation, expand the tax base, improve tax compliance, simplify the language and lower tax litigations. Initial analysis shows that most of these objectives are achievable by the tweaking of some provisions.

Law firms service tax
The last budget had made 10 per cent service tax payable by law firms.

In November 2009, the Society of Indian Law Firms (SILF) issued a writ in the Bombay High Court to force the Government to scrap the service tax on law firms.

In late January meanwhile, partners of law firms such as Bhasin & Bhasin Associates, Sagar & Sagar Associates, Luthra & Luthra, and Hammurabi & Solomon met Finance Minister Mukherjee to urge for withradwal of service tax on law firms.

The latest hearing in the writ petition was listed to have taken place on 11 February 2010 in the Bombay High Court as a "rules for argument" hearing.

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