Taxability of Legal Services

Finance Act, 2010 has expanded the scope of service tax of legal consultancy services w.e.f. 1^st May, 2011

Finance Act, 2011 has substituted the definition of taxable service under clause 65 (2105) (zzzzm) as follows –

“Taxable service means any service provided or to be provided

(i) to any person, by a business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner;

(ii) to any business entity, by any person, in relation to representational services before any court, tribunal or authority,

(ii) to any business entity, by an arbitral tribunal, in respect of arbitration.

Explanation – For the purposes of this item, the expressions “arbitration” and “arbitral tribunal” shall have the meanings respectively assigned to them in the Arbitration and Conciliation Act, 1996;’;

The amended definition seeks to specify and expand the scope of legal consultancy services to cover –

(a) services provided by a business entity to individuals in relation to advice, consultancy or assistance in any branch of law;

(b) representational service before a judicial or quasi-judicial authority provided by any person to a business entity, and

(c) include arbitration service provided to any business entity by a arbitral tribunal;

It may be noted that representational services provided to individuals will continue to be exempt form levy of service tax. Also services provided by individuals to other individual shall remain outside the scope of taxable services.

Arbitration & Conciliation Act, 1996 defines the words ‘arbitration’ and ‘arbitral tribunal’ as follows –

‘Arbitration’ means any arbitration whether or not administered by permanent arbitral institution [section 2 (1) (a)]

‘Arbitral Tribunal’ means a sole arbitrator or a panel of arbitrators [section 2(1) (d)].

Taxability Matrix (Wef 1.5.2011)

Service provider	Service receiver	Taxability	Service
Individuals	Individuals	No	Any service
Any person including Individuals	Business entity	Yes	Representational service before court / tribunal / authority
Business entity	Any person including Individuals	Yes	Advice, consultancy & assistance in any branch of law
Business entity	Business entity	Yes	Any service
Arbitrators	Business entity	Yes	Arbitration
Individuals	Business entity	No	Advice, consultancy & assistance in any branch of law.

As a latest update, Delhi High Court has granted an interim stay on 29.4.2011 on levy of service tax individual lawyers rendering services to business entities on a Writ Petition No 2792 filed by Delhi based lawyers till next date of hearing ,ie, 23^rd May, 2011. This may just be the beginning of long legal battle. Gauhati high court has also granted interim stay.