DISCRIMINATIVE LEVY OF SERVICE TAX ON CHARTERED ACCOUNTANTS (By SIVADAD CHETTOOR B.COM FCA LL.M)

DISCRIMINATIVE LEVY OF SERVICE TAX ON CHARTERED ACCOUNTANTS

(By SIVADAD CHETTOOR B.COM FCA LL.M)

INTRODUCTION

This article deals with the discriminative levy of service tax (ST) on practicing Chartered Accountants (CA) vis-à-vis the practicing lawyers. All the services provided by a CA are subject to the levy. But there are certain similar services which are rendered by other professionals like advocates which are not subject to the levy. There lies the discrimination. For example a CA is authorised to act as an Authorised Representative (AR) before the Income Tax authorities and the fee charged by him attracts ST.  An INDIVIDUAL advocate is also qualified to act as an AR but the fee charged by him for

the very same service is not taxed and enjoys specific exemption to the extent specified therein. It would mean higher cost to a person who avails the services of a CA compared to the services of an Advocate. This differentiation on the very face of it is unreasonable and unjustified. This article seeks to discuss this aspect of discrimination which cannot be justified by a democratic government bound by the rule of law.

It may be noted that in this article the discussion pertains to two professionals only but the author feels that it would apply to all other professionals also who are similarly placed like company secretaries, cost accountants etc.

THE HISTORY OF THE LEVY

The levy of service tax on Chartered Accountants (CA) was imposed in 1998 by the notification No 53/98-ST dated 07-10-1998. All the services provided by a practicing chartered accountant in his professional capacity in any manner were brought into the tax net. Like a rat in the trap he also first tried to get out of the net by challenging the constitutional validity of the levy itself only to feel the taste of defeat in All India Federation Of Tax Practitioners v UOI (2007) 7 STR 625 (SC). But he got some consolation vide notification No 59/98-ST dated 16-10-98 whereby all the services provided by a CA were granted exemption except the two services related to accounting and auditing.  It may be noted that even management consultancy and manpower recruitment services rendered by a CA were outside the net since the exemption was granted to the practicing CA in respect of all his professional activities except the two areas specified. But vide notification No 15/2002 –ST dated 01-08-2002 it was specifically explained that a CA shall be liable for services rendered in the field of management consultancy and man power recruitment.

Alas…the benefits or bounty by the government did not last long. Notification No 59/98 was withdrawn and By Notification No 02/2006 dated 1-03-2006 all the services of a practicing CA were brought to the tax net. But on the basis of strong representations the government has exhibited some leniency by issue of Notification No 25/2006-ST dated 13-07-2006 whereby exemption was granted to services relating to representing the client before any statutory authority in the course of proceedings initiated under any law for the time being in force, by way of issue of notice (known among CA circles as notice cases) to be effective from 13-07-2006. But it is unfortunate that the said benefit was taken away by Notification No 32/2011-ST dated 25-04-2011. So the CA is now in the same position as he was in the beginning of the levy in 1998.

TAX PRACTICE

Though auditing and accounting are considered as the core areas of the chartered accountants but traditionally tax practice was also considered to be an important area where they played a key role. The Institute of chartered accountants of India (ICAI) in its web site observed as follows:

“With a number of taxes on the statute book, current and continuing tax information has become vital to the effective economics of business management. The assessment of taxes is very closely linked with financial accounts. The Chartered Accountant with his experience in accounts is in an advantageous position for preparing the returns for tax purposes, representing assessees before the Income-Tax authorities and rendering general advice on taxes to his clients.”

Thus it is clear that a major area of practice is taxation which would include both direct taxes like Income tax, Wealth Tax etc  and indirect taxes like Excise duty, customs duty, service tax and Vat  etc.

AUTHORISED REPRESENTATIVE (AR)

Attention is invited to Section 288 of the Income Tax Act 1961 (IT Act) which permits a CA as well as other professionals including an Advocate to represent the assessees before the Income tax authorities. It may be noted that Section 44 of the Wealth Tax Act 1957 and Section 43 of the Gift Tax Act 1958 (now kept under suspension) permits CA and an advocate to act as AR.

As per Rule 12 of the Central Excise Appeal Rules 2001 a CA is qualified to represent or act as an authorized representative for the purposes of clause (c) of sub-section (2) of section 35Q of the Act and an Advocate is also granted with the same privilege. Similarly, Rule 9 of the Customs (appeals) Rules 1982 read with section 146A of the Customs Act 1962 provides for appearance by both CA and an Advocate before all customs authorities.

Regulation 19(2) of the Company Law Board Regulations 1991 also allows CA as well as an Advocate to appear in proceedings before it. Likewise Section 16 of the Foreign Exchange Management Act 1999 permits both to represent parties. There are so many other legislations also which grants similar privileges on both the professionals.

The above discussions clearly reveal that both CA and an Advocate are treated at par and are treated as equals so far as their entitlement and qualifications to act as AR are concerned.

POSITION FROM 01-07-2012

The law has undergone substantial changes effective from 1 st July 2012. Hitherto the levy was based on positive list where services sought to be taxed were specifically listed out. But from 1-7-12 onwards it became negative list based levy ie all services are taxable except those specified in the negative list or in the exemption notifications.

The law now defines the term “service” under section 65B(44) and  means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include certain items specified therein like mere transfer of property in goods, actionable claims, money transactions, services of employees etc. The law declares certain services to be taxable known as declared services. Then there are services which are exempt as per exemption notifications issued by the Central government in exercise of its vested power under section 93(1) of the Finance Act 1994.

On a bare look at the new definition of service the conclusion is irresistible   that the services rendered by a CA as well as a lawyer shall be squarely covered. The services carried out by a CA/advocate to a client can be regarded as an activity for consideration. The levy also cannot be seriously disputed as the apex court has already upheld the constitutional validity. There is no exemption to the services rendered by a CA as per the notifications and it does not appear in the negative list also. Hence the burden of tax clearly falls on his shoulders.

BUT A PRACTICING LAWYER IS EXEMPT !!!

Alas…..The exemption Notification No: 25/2012 –ST dated 20-06-2012 grants exemption in respect of  services provided by  an individual as an advocate or a partnership firm of advocates by way of   legal services to (i) an advocate or partnership firm of advocates providing legal services ;(ii) any person other than a business entity; or (iii) a business entity with a turnover up to rupees ten lakh in the preceding financial  year; or (c)  a person represented on an arbitral tribunal to an arbitral tribunal. (See serial No 6(b) of the notification).

Thus the discrimination is very clear. The individual advocate/firm of advocates is given a blanket exemption if they render services to non-business entities and partial exemption to services rendered to business entities. The legal services mentioned in the notification are very wide enough to cover the services rendered by a lawyer as an Authorised representative(AR)under the various enactments specified in the above paragraph under the caption “Authorized Representative (AR)”. But the very same services rendered by a practicing CA are taxable be it business entity or non-business entity. Are there any reasons or basis for granting exemption to lawyers alone while putting the burden of tax for the same activities performed by similarly placed professionals? The author fails to find any justification for the same. Although lawyers are not given complete immunity, a majority of the practicing lawyers doing services as Authorised Representatives are individual advocates or a firm of lawyers. Please note that the exemption is not available in case the services are rendered to a business entity unless its turnover is below Rs 10 lakhs per annum. But it is well known that a considerable portion of the clients are not business entities and hence in respect of those services lawyers enjoy total exemption.

FULL REVERSE CHARGE MECHANISM

In addition to the above another advantage of full reverse charge mechanism is granted to individulal /firm of advocates in respect of legal services which is denied to a CA vide notification No 30/2012-ST dated 20-06-2012. By virtue of the notification 100% of the service tax liability connected with the legal services rendered by an advocate is to be discharged only by the client or party receiving the services.

IS THE SERVICES OF A LAWYER AT PAR WITH A CA?

 The author is of the firm view that services rendered by a CA and a lawyer while acting as AR is very similar and almost identical. The first decision which supports the view is that of the Madras High court in CIT v. G.M. Dandekar [1952] 22 ITR 235 (Mad)wherein the Division bench consisting of Justice Rajamannar and Justice Venkitarama Iyer, in crystal clear terms held as follows

“Mr.Ramamurthi Iyer the learned advocate for the Council contended that the respondent was a representative of the assessee in the income-tax proceedings; that his position was analogous to that of an advocate appearing for a party in court and that he owed a duty to the income-tax department to act fairly in the presentation of the case of the assesses. We agree that the position of Chartered Accountants representing the income-tax assessees is similar to that of Advocates representing parties in court and that their obligations are similar to those of advocates.”

Attention is also invited to the observations of the Hon’ Karnataka High Court in Philipose and company V State of Karnataka reported in 67 Compcas 154 wherein the court observed as follows.

“In view of the fact that the profession of accountancy is not very much different from the profession of a lawyer, I am clear in my mind that the law laid down by the Supreme Court in the case of V. Sasidharan [1984] 65 FJR 374 is applicable to the facts of the petitioner’s case.”Thus the Hon court clearly held that the functions of a CA and an advocate are very much similar.

There was a controversy regarding whether a lawyer’s firm is a “Commercial Establishment”as per the Shops and Establishment Act and it was settled by the decision of the Hon Supreme court in V. Sasidharan [1984] 65 FJR 374 wherein it was held that it is neither a Shop nor a Commercial Establishment. A similar controversy arose in the case of a CA firm and on the analogy that both the professions have common characteristic features the said decision was applied to CA firm also.

Incidentally, The author wishes to make a reference to the following observations of Justice Palekar (as he then was) in Merchant M.E v Bombay Municipal Corporation (1968) ILLJ 187 (Bom)wherein the learned Judge equated CA with the other professionals and emphasised that CA should also be added to the list of the traditionally recognised three learned professions ie Church, Medicine, and law.

“The three learned professions referred to in the above quotation cannot be the only professions for all time. Times change. The sphere of human activity and endeavour is constantly expanding, giving rise to problems which require specialization and expertise. In the course of last two centuries, trade, commerce and industry have vastly developed bringing in their wake problems which have to be tackled by experts. The old crystallized learned professions of the Church, Medicine and Law were, by the very nature of their training, unable to solve the problems of the new developments in trade, commerce and industry, which, inter alia, threw up a team of experts in the shape of chartered accountants having specialized knowledge.”

From the above brief analysis there is no difficulty to conclude that both the professions are to be treated at par with each other and cannot be separated as a totally unconnected class of professionals.

ARTICLE 14 OF THE CONSTITUTION

Let us see what Art.14 provides for which is reproduced below for the ease of reference.

Equality before law: The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

Article 14 enjoins upon the state not to deny to any person "equality before the law" or "the equal protection of the laws" within the territory of India. Most constitutions speak of either "equality before the law" or "the equal protection of the laws", but very few of both. 

Article 14 imposes twin duties on the state. The first duty is to treat persons equally before law and the Second to extend equal protection of law to all persons without discrimination. It has been held by the Apex court in Dalmia cement Ltd v UOI (1996) 10 SCC 104 at page 15 that the twin concepts in its proper spectrum encompasses social and economic justice in a political democracy.

EQUALITY BEFORE LAW

Attention is invited to the observations  of the Hon Supreme Court in Indra Sawhney v UOI reported in AIR 1993 SC 477 (at Para 3,4and 5) which are reproduced below.

“The doctrine of equality has many facets. It is a dynamic, and an evolving concept. Its main facets, relevant to Indian Society, have been referred to in the preamble and the articles under the sub-heading "Right to equality"-(Articles 14 to 18). In short, the goal is equality of status and of opportunity. Articles 14 to 18 must be understood not merely with reference to what they say but also in the light of the several articles in Part IV (Directive Principles of State Policy). "Justice, Social, Economic and Political", is the sum total of the aspirations incorporated in part IV.

Indeed, in a society where equality of status and opportunity do not obtain and where there are glaring inequalities in incomes, there is no room for equality - either equality before law or equality in any other respect. Equality has been and is the single greatest craving of all human being sat all points of time. It has inspired many a great thinker and philosopher. All religious and political schools of thought swear by it, including the Hindu religious thought……”

The doctrine of equality before law does not lead to the conclusion that all the laws should have universal application and all the persons must under all circumstances be treated equally. Some persons may require special treatment before law because of social or economic reasons. For example, imposition of Income tax only on persons having income above a particular limit can be justified since if it is imposed on all that will definitely cause considerable difficulties to really poor persons.

EQUAL PROTECTION OF LAW

Das C. J., in BashesharNath v CIT  explains the scope of the equality clause in the following terms:

"The underlying object of this Article is undoubtedly to secure to all persons, citizens or non-citizens, the equality of status and of opportunity referred to in the glorious preamble of our Constitution. It combines the English doctrine of the rule of law and the equal protection clause of the 14th Amendment to the American Federal Constitution which enjoins that no State shall "deny to any person within its jurisdiction the equal protection of the laws ". There can, therefore, be no doubt or dispute that this Article is founded on a sound public policy recognised and valued in all civilised States…”

Art. 14 only prohibit unequal treatment of persons similarly situated and equal protection means the right to equal treatment under similar circumstances. (see Shrikishansingh v State of Rajasthan AIR 1955 SC  795)

“The principle does not take away from the State the power of classifying persons for legitimate purposes.  Every classification is in some degree likely to produce some inequality, and mere production of inequality is not enough.”

“While reasonable classification is permissible, such classification must be based upon some real and substantial distinction bearing a reasonable and just relation to the object sought to be attained, and the classification cannot be made arbitrarily and without any substantial basis.” ( see State of Bombay v F.N Balsara  1951 AIR SC 318.

What then is the scope of permissible classification? Classification is permitted provided it fulfils two conditions 1) that the classification must be founded on a intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group and 2) that the differential must have a rational relation to the object sought to be achieved by the law. (see Budhan Choudhary v State of Bihar AIR 1955 SC 191)

IS THE DISCRIMINATION HIT BY ARTICLE 14 OF THE CONSTITUTION?

Yes, according to the author. On a plain reading of the Article it is clear that the state is duty bound to extent equality before law as well as equal protection of law. The author feels that the State denied to a CA not only equality but also equal protection of law.

The state denied equality by meting out a special treatment to individual advocates/ firm of advocates. The notification grants exemption even in respect of services rendered by advocates to business entities having turnover below 10 lakhs per annum. The object of the Act is to impose service tax on all services by all persons. Therefore granting exemption to advocates while denying the same to similarly placed CA and other professionals is plainly a situation of unequal treatment of persons in the matter of levy of tax. Hence the law suffers from the vice of constitutionality as it clearly violates Art.14.

The State also denied equal protection of law by denying the protection to CA while extending the same to an Advocate. It has already been explained that CA’s as a class is similar to an advocate. If that be so there is no intelligible differentia. There is no rational relation between the classification and the objects sought to be achieved as the object of the levy is to impose tax on all services in general.

There is also a clear discrimination. If an individual advocate renders services to a business entity with turnover less than 10 lakhs he is exempt from tax whereas the very same services if rendered by a CA attracts the levy. Is it not plainly discriminative?

Take another instance. In the case of a service rendered by an individual advocate or firm of advocates which attracts tax, still he is not liable to pay any tax as the 100% service tax has to be borne by the service receiver ie the client. The above facility is denied to CA. Is it not a clear case of discrimination?

It may be noted that the law does not enjoin on the person challenging the state action under Art.14 to prove that the law has been enacted with an intentional or purposeful discrimination. Justice Mukherjea observed in State Of West Bengal v Anwar All Sarkar1952 AIR 75 (SC) as follows.

“if it is established that the person complaining has been discriminated against as a result of legislation and denied equal privileges with others occupying the same position, I do not think that it is incumbent upon him, before he can claim relief on the basis of his fundamental rights, to assert and prove that in making the law, the legislature was actuated by a hostile or inimical intention against a particular person or class.”

CONCLUSION

In view of the discussions above, it is submitted that the action of the state in granting certain benefits only to advocates while denying the same to chartered accountants is hit by article 14 of the constitution and hence unsustainable. The action clearly results denial of equality and equal protection of law which constitutes one of the fundamental principles enshrined in our constitution. It is suggested that the central government may by amending the notifications extend the same benefits to chartered accountants as well as other professionals like company secretaries, cost accountants, tax practitioners etc. The sooner the better.