The Goods and Service Tax (GST) in India offers a more comprehensive and more formalized indirect tax structure without the cascading effects of the erstwhile VAT regime. The GST categorizes supply of goods and services under four tax slabs 5%, 12%, 18%, and 28%. In technical terms, GST is a multi-stage destination-based tax that is levied on every stage of value addition. The GST was touted as a major reform towards formalization of the unorganized sector as well as making business operations easier and more accountable. And it is not just the common taxpayers and business owners, GST has equally impacted the legal community too.
Although the initial assumption was that individual lawyers and law firms were outside the GST Framework, it is now clear that the Central Goods and Services Tax Act subsumes advocates, services provided by legal advisors, lawyers or and law firms. GST On Lawyers, Advocates and Legal Advisers will be levied on the following entities and services.
1. An individual-advocate (including Senior Advocate) or law firm providing legal services to business firms/owners with collective previous year turnover of Rs. 20 Lakhs or more.
2. Service offered by a Senior Advocate to other advocate or a law firm.
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Not all legal services are taxable under GST. There are certain services which have been exempted or zero-rated under GST. These services include those offered by law firms or an individual lawyer (excluding senior advocates) to:
A person who does not own a business.
An individual advocate or partnership firm of advocates.
A business entity with previous annual turnover not exceeding Rs. 20 lakh.
The following services by a Senior Advocate are exempted under GST
Legal Services to a person other than a business entity, or
Legal Services to a business entity with previous annual turnover not exceeding Rs. 20 lakh.
What is the Reverse Charge Mechanism?
In simple terms, RCM or Reverse Charge Mechanism is an anti-Tax evasion mechanism under GST. Primarily, GST is levied on every stage of value addition and is collected by the manufacturer, seller or service provider from the consumer or recipient. Post output liability adjustment, the tax is deposited by the manufacturer or service provider with the Indian Tax Authority.
Under RCM, the participant roles are reversed. This means the consumer or recipient is liable for tax payments. The Section 9(3) of Central Goods and Services Tax Act, 2017 directs recipient of Goods or Services to deposit liable tax with the government.
In August 2017, The GST Council clarified that tax will be levied according to Reverse Charge Mechanism against services provided by lawyers including Senior Advocates and law firms. This means that GST on legal fees will be payable by the recipient of the legal service and not the service provider. The same has been stated by the Finance Ministry too. As per the Finance Ministry, Lawyers, with gross annual income greater Rs. 20 lakhs, need to get registered under the reverse charge mechanism of the GST system for legal services provided by them.
Hence, legal services like client representation before any court, tribunal or authority are liable under GST. But it is the client who needs to pay the service tax depending on the territory and the consulting lawyer/firm charges. A writ petition for the same was filed by J.K. Mittal and Company. In it, the law firm challenged the validity of the ‘reverse charge’ mechanism on lawyers. However, the Finance Ministry clearly stated that GST liability against legal services procured from an individual lawyer (including senior advocates) is the sole liability of the client or recipient of the service. Further, RCM is also liable against outsourced legal services where legal services are hired from a particular lawyer or law firm but services are provided by a third party advocate or law firm in a different territory.