GST Regime: Impact on Advocates & Law Firms

Legal Services has been first brought under the ambit of the collection of Indirect Tax by lawmakers with the aim to extend the regime of Indirect Tax to all the spheres of economic activity through the Finance Act, 2009 and imposed service tax on legal services also, whereby the new taxable category of ‘legal consultancy services’ was introduced. While, appearances before Courts, Tribunals and any other adjudicating authority were kept outside the taxable category. However, services by way of representation before the judicial authorities were also brought within the tax net by the Finance Act, 2011.

In the year 2012, the service tax law underwent a significant change by moving to a negative list based regime, whereby except some specified services, the rest were brought within the tax net.

Treatment of ‘Advocacy Services’ under the Negative List regime:

Along with the introduction of the Negative List Regime in 2012, the Central Government provided for a specific exemption for ‘legal services provided by an individual advocate or a partnership firm of advocates to a certain class of people’. However, in the circumstances or condition where there was no exemption, the liability of paying service tax was imposed on a ‘reverse charge basis’ i.e. liability was upon the service recipient/client.

Given the foregoing, in general, Advocates and Law Firm did not obtained registration under erstwhile Service Tax laws.

With this background, let us now understand the treatment accorded under the GST regime to supply of services rendered by legal fraternity.

Tax treatment of ‘Advocates and Law Firms’ under the GST regime

The Central Goods and Service Tax Act, 2017 (hereinafter “the CGST Act”) (along with other GST legislations) has been enacted to subsume all the multifarious indirect taxes into a single levy. Section 7 of the CGST Act provides for the charging section whereby the expression “supply” has been deemed to include all forms of supply of goods or services or both for a consideration and in furtherance of a business.

In general, the essential ingredients to determine whether a supply of service is taking place is to determine whether services have been rendered in lieu of a consideration and the same has been performed in furtherance of business activities.

Under the powers vested under Article 279A of the Indian Constitution, the GST Council finalized its recommendations on the GST rates for services including the exemptions to be carried forward from the previous regime.

In this regard, it would be worth noting that exemption from payment of GST has been extended to ‘Advocates and Law Firm’ rendering legal services to any person other than a business entity and in the case of business entities, the exemption extends to business entities with a turnover of up to INR 20 lakhs (in the case of general category States) and INR 10 lakhs (in the case of special category States like the north-eastern States).

Further, the Government has maintained status quo for individual advocates / firm of advocates, prescribing 100% reverse charge mechanism in case of legal services rendered (subject to exemptions) i.e. the entire tax burden would be borne by the service recipient / client. Even without a special mention of Senior Advocates as a separate category in the reverse charge list, in light of the latest position under GST it can be inferred that under the list of ‘reverse charge category of services’ as approved by the GST Council, services provided by an ‘individual advocate’ includes the services of a ‘Senior Advocate’ which would mean that even the services provided by Senior Advocates would be chargeable under the reverse charge category.

Placing of Advocates and Law Firms under the ‘Reverse Charge Mechanism’ is adding to their cost structure as they could not claim Input Tax Credit on the input supply of goods and/or service and the tax paid at the time of procurement, which was not the case with other usual service providers/consultants.

As per Item No. 20 having Chapter, heading 9982 service mentioned as ‘Legal & Accounting Service’ shall be subjected to 18% GST as per Notification No. 8/2017- Integrated Tax (Rate) dated 28.6.2027 and the corresponding Notifications under Central GST Act, 2017 as well as State GST Act 2017. Thus, an Interstate supply of service would be subjected to 18% IGST Tax while an intra-state supply of service of ‘Legal & Accounting Service’ would be subjected to 9% CGST with 9% SGST.

Further, as per Notification No. 9/2017- Integrated Tax (Rate) dated 28.6.2017 under Item No. 47  and the corresponding Notifications under Central GST Act as well as State GST Act 2017 for heading 9982 or Heading 9991 no IGST or CGST or SGST would be leviable as per the following Entry:-

Proceeding further, in-accordance to Notification No. 10/2017-Integrated Tax (Rate) dated 28.6.2017 and the corresponding Notifications under CGST Act as well as SGST Act the following services as specified below shall be covered under Reverse Charge Mechanism, meaning thereby the recipient of the service who is making the payment to an individual advocate or to a legal firm of advocates have the responsibility of paying the GST U/s 5(3) of IGST Act as well as U/s 9 (3) of CGST Act and SGST Act.

Section 2 (zl) of GST Law :“legal service” means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority;

The most important of all in accordance to Notification No. 5/2017 dated 19.6.2017 of CGST Act as also applicable for IGST & SGST, the category of persons who are only engaged in making supplies of taxable services, the total GST on which is liable to be paid on Reverse Charge basis by the recipient of such services then the service provider would be exempted from obtaining the registration under the GST Law. Notification No. 5/2017 – Central Tax; dated 19th June, 2017 has been issued, providing exemption from registration for “persons who are only engaged in making supplies of taxable goods or services or both, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services or both”.

Given that all legal services whether by a law firm or individual lawyers including Senior Advocates will be liable to Reverse Charge under GST and all law firms / individual lawyers are only providing legal services, thus have no other output GST liability of their own – they would all be exempt from registration under GST. However, the position of the requirement of registration will be needed to be analyzed in case a Law Firm provides any type of legal service outside the country and receives the consideration in foreign exchange in the country.

Mukul Gupta,
Senior Partner & Counsel
SHARNAM LEGAL