The Finance Ministry has reversed its earlier budget proposal that would make service tax payable by professionals such as lawyers when bills are issued rather than when they are paid, after protests and representations from lawyers that this would be unduly onerous.

The Ministry of Finance revised the “Point of Taxation” rules with notification number 25/2011 dated 31 March 2011.

This will return the service tax regime to the status quo so that proprietary or partnership firms will only have to pay the tax from the date on which payment is received.

Society of Indian Law Firm (SILF) president Lalit Bhasin, who had vowed to file a second writ petition against the widening of service tax on legal practitioners confirmed the development at a SILF function two weeks ago, noting that the proposed rules were revoked after members of SILF held discussions with the chairman of the central board of excise and customs and the revenue secretary.

Delhi-based Athena Law Associates’ partner Puneet Agrawal told Legally India that the point of taxation for lawyers would now be the date of receipt of payments.

Apart from advocates, seven service providers including architects, chartered accountants and scientific and technical consultants, have been covered under the fresh notification, Agrawal added.

However, there has been no change in the rules that made service tax applicable on individuals advising corporate entities in courts or tribunals, according to Agrawal, although he noted that those rules were still not notified. A side-effect of those rules could mean that potentially associates would have to pay service tax to their law firm employers.

Country-wide agitation and strikes called by advocates’ bodies and representations by PHD Chambers of Commerce and Industry and Federation of India Chambers of Commerce and Industry (FICCI) members reportedly led to the change in the government’s stance on the issue.

The new rules are available on the service tax department’s website:

“7. Determination of point of taxation in case of specified services or persons.- Notwithstanding anything contained in these rules, the point of taxation in respect of,-

(a) the services covered by sub-rule (1) of rule 3 of Export of Services Rules, 2005;

(b) the persons required to pay tax as recipients under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Finance Act, 1994;

(c) individuals or proprietary firms or partnership firms providing taxable services referred to in sub-clauses (p), (q), (s), (t), (u), (za), (zzzzm) of clause (105) of section 65 of the Finance Act, 1994, shall be the date on which payment is received or made, as the case may be:

- Provided that in case of services referred to in clause (a), where payment is not received within the period specified by the Reserve Bank of India, the point of taxation shall be determined, as if this rule does not exist.

- Provided further that in case of services referred to in clause (b) where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist.

- Provided also that in case of “associated enterprises”, where the person providing the service is located outside India, the point of taxation shall be the date of credit in the books of account of the person receiving the service or date of making the payment whichever is earlier.”