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Budget fall-out: Litigating associates will have to charge their law firms service tax

Exclusive: Law firms’ litigation associates could find themselves liable to have to charge service tax to their law firms and account for it to the Revenue under the Budget’s new service tax rules that apply to individuals representing businesses in courts or tribunals.

Economic Laws Practice (ELP) associate partner Nishant Shah and Vaish Associates indirect tax head Shilpa Sharma confirmed the potential personal liability to Legally India.

Under the new Finance Bill all law firms now have to pay service tax for services rendered to anyone, while individuals will only be subject to service tax when providing “advice, consultancy or assistance in any branch of law, in any manner” to “a business entity”.

On the hook

Shah and Sharma both said that the new provision was a grey area when it came to associates working for law firms and doing representational work, although those doing only transactional work would not be included.

Shah said: “It seems that a legal guy who’s in the litigation portion will be liable to service tax even when he is rendering to a law firm. It is also the situation for most of the senior counsel – you might brief a senior counsel and the senior counsel would raise the bill on the law firm or [business] entity directly, and would be required to pay service tax.”

He explained that if an associate charged Rs 100 to the law firm for a court appearance, the law firm would have to pay roughly 10 per cent service tax to the associate, taking the charges to Rs 110. To the client the law firm might charge Rs 200 but it would be able to take credit for the Rs 10 paid to the associate and only pay an additional Rs 10 per cent of service tax.

However, such associates would then have to account for the service tax to the Revenue in their tax returns if their gross service taxable billings were above Rs 10 lakh per year.

Sharma said that service tax would only apply if a law firm lawyer raised a specific bill for a representational appearance: “If I am appearing [in court] on behalf of Vaish Associates for a particular company, Vaish will obviously charge service tax. But when I am raising my bill to Vaish Associates as an individual – if I say I have appeared and raise a bill for the purpose of appearance - then it will be taxed.”

“If I am actually going again and again to the court – and I raise a bill to the firm for so many appearances then I would also have to charge [service tax],” she noted but added: “They are not clear about it.”

She continued that although any difference in whether an associate or firm paid service tax would be tax neutral, the Revenue could go after individual associates. “You never know.”

No clarity for part-time transactional litigators

There is not much clarity on how lawyers who only spend part of their time doing court work would be taxed or how tax liability on the monthly retainer or salary paid to a part-time litigation lawyer would be apportioned. “Even a transactional lawyer might in some cases appear before the court - how does he bifurcate that?” asked Shah.

ELP had not been able to explore fully yet whether there was a way of structuring it, said Shah. “Reading the bare lines of the law, you might go into a proportionate basis. For the associate that might come even more cumbersome and will have to prove that his actual work profile contains only 10 per cent representational work. To prove that might not prove a simple task.”

According to Sharma, however, most part-time litigating lawyers on a fixed retainer would not have to pay service tax because the firm would be paying, unless the lawyer raised a specific bill for the representational appearance.

A Ministry matter

Shah and Sharma both said that the Ministry of Finance should be approached about the new law. Shah suggested that the Ministry could create a “reverse charge” mechanism as is used in goods and transport services, which would allow the law firm to pay the tax on behalf of the associates.

“One of the points that can be put before finance ministry is that in this scenario you are creating bigger scrutiny base without increasing the tax,” he noted, which would “reduce the stress or procedural burden” on the collection of the tax.

Sharma explained that she would be making this representation to the Indian Merchant Chambers too, which could then raise it with the Ministry in Finance Bill consultations.

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