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Budget hits lawyers with service tax - legal bills likely to rise

The 2009-10 Union Budget has extended service tax to lawyers, which could directly increase legal bills to clients and result in downward pressure on fees.


Finance Minister Pranab Mukherjee said today in his budget speech: "I propose to extend service tax on advice, consultancy or technical assistance provided in the field of law."

Luthra & Luthra tax partner Vikas Srivastava said: "The bottom line is this increases costs [of legal services] by 10 per cent." Service tax is currently charged at 10 per cent.

Amarchand Mangaldas tax partner Aseem Chawla explained that although outgoing service taxes can be offset against incoming service taxes, law firms provide more services than they receive and it would not be a "cash neutral" situation.

"At the end of the day, you pass it on to the customer," he said.

One tax partner said that it was likely for clients to in turn apply downward pressure on their legal advisers' fees.

Another added: "This is bad news."

The Finance Minister said that the tax would not apply to lawyers practising alone or to clients who were individuals and he preceded his announcement by explaining that accountants, company secretaries and consultants were already subject to service tax. 

Mukherjee added: "Although there is a school of thought that legal consultants do not provide any service to their client, I hold my distinguished predecessor in high esteem and disagree!"

One tax partner explained the reasoning of P. Chidambaram, who was Finance Minister between 2004-08 and a lawyer himself.

"The view was that a lawyer gives advice and is not a service provider and that his stature is of a higher status and is not just about providing a service," he said.


Today's Budget has also set out the tax position of firms wanting to convert to  limited liability partnerships (LLP) and introduced a more powerful advance rulings tribunal for taxes, which could be a welcome relief for foreign investors.

Contrary to the Delhi and Lucknow bar, the Bar Council of India has come out in favour of the service tax.

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