While the nation is still confused about the concepts and application of GST, it's important that we briefly explain what GST means before we start talking about the applicability of GST on legal services.
Goods and Services Tax (GST) is an indirect tax levied on the supply of goods and services in India. The introduction of GST was to replace indirect taxes with a unified tax, in order to reshape the country's economy. However, it faced a lot of criticism at the end.
For collecting tax in India, there is a division of goods and services into five tax slabs:
Before GST came into the picture, the statutory tax rate for most goods was about 26.5%. And after GST, the Indian indirect taxation system was redefined. It would earlier comprise of service tax, VAT, excise duty, customs duty, etc.
The current GST in India is divided into four tax brackets starting from 5% and ending at 28%. Its impact has also hit the legal community, bringing advocate services under GST as well. The general belief is that GST on legal services is not applicable to individual lawyers and law firms. However, the question on the applicability of GST on advocates, law firms and their services still remains.
GST is chargeable when a lawyer or law firm provides any kind of legal service to a business entity having an aggregate turnover of Rs. 20 Lakhs or more in the previous financial year. GST on legal services is also chargeable when a senior advocate provides legal service to another advocate or firm of advocates.
Applicability of GST on Advocates and Legal Services
After the implementation of the GST Law, there is no change in the taxation of legal services. Neither is it applicable on reverse charge nor forward charge for advocates and law firms.
- The Central Goods and Service Tax Act, 2017 (CGST Act) along with other GST legislations has been enacted to subsume all indirect taxes into a single levy.
- Section 7 of the CGST Act deals with charging where the expression 'supply' has been deemed to include all forms of supply of goods or services or both for consideration and in furtherance of a business.
- Under Article 279A of the Indian constitution, the GST rate on legal fees for lawyer services along with exemptions carried from the previous regime was finalized by the GST Council.
There is an exemption from the payment of GST on Lawyer fees and Law Firm fees. Only if they are providing their services to any person and not a business entity.
In the case of business entities, the exemption extends to those:
- having a turnover up to Rs 20 lakh (general category states) and
- having a turnover up to Rs 10 lakh (special category states like North-East).
After the government introduced GST in July 2017, it has gone through many changes over the time period. Under GST on legal services, senior advocate is a separate category in the reverse charge list. They are under the list of reverse charge category of services.
As per GST law, all legal services whether by a law firm or individual, are all liable for payment under Reverse Charge. All law firms or lawyers providing legal services have no other output for GST liability of their own. As they would all get exemptions from registration under GST on legal services.
However, you need to check the registration of a law firm that provides legal services outside India. Apart from that, you also need to keep a check on the receipt of the amount of consideration value of foreign exchange in India.
Is there GST on Legal Fees and Services?
Legal services provided under entry 2 (zm) of notification no. 12/2017 – Central tax (rate) on the date, 28.06.2017 defines it as follows- 'Legal service is 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'.
It is further clarified that notification No. 13/2017-Central Tax (Rate) dated 28.6.2017, (Serial No. 2) specifies, inter alia, the following service under reverse charge mechanism as- 'Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or by a firm of advocates, or by way of legal services to a business entity'.
Before imposing the GST on lawyers & law firms, legal services were brought under the scope of indirect tax through the Finance Act, 2009. The aim was to extend the regime of indirect tax to all spheres of economic activity. Thereby imposing service tax on legal services under the category of 'legal consultancy services' which was taxable.
In 2012, the service tax law introduced the Negative List Regime. Here, the government included a specific GST exemption for any kind of legal services by an individual or a law firm. However, in conditions where the levy is on a reverse charge basis, the liability of paying service tax has no exemption. Meaning the liability was on the service recipient/client.
So, considering that time, lawyers and law firms did not register. Whereas now, the GST on law firms and GST on legal services has to be in accordance with the newly set GST regime of 2017.
Does that mean the rules of reverse charge mechanism apply to the lawyers who provide legal services to an organization, but are not a part of law firms? Well, if someone is not a practising lawyer, then he/she has to pay GST.
Earlier both service providers and recipients didn’t have to pay taxes. But if you’d take the same services from a person who is not a practising lawyer, it was taxable. However, now, there is GST on advocate fees or law firms fee but they don’t have to pay GST. So, if a lawyer is practising in a firm or is representing himself individually, he/she has to get registration under GST first. Registration under GST on lawyers is not mandatory right now. Also, you don't have to pay any professional tax, because all taxes are a combination of one.
GST Registration for Lawyers & Law Firms
GST law does not differentiate in regard to obtaining registration between individuals and partnership firms. However, GST law makes it mandatory, that a person making inter-state taxable supplies is required to obtain registration.
Also, it is notified that people who are engaged in making taxable supplies are excluded from GST registration. Reason being that tax is liable to be paid by the recipient of goods and services on the reverse charge basis.
If the recipient is located abroad, then the GST on reverse charge mechanism will not apply here. Instead, there will be a liability to discharge GST, proving the eligibility for export benefits, which would then fall on the concerned lawyer/law firm/LLP. Now, this can only be done after obtaining registration GST for lawyers in India.
To claim the benefit of ‘export of service’ under GST, lawyers or law firms are required to obtain the registration, whenever invoices are raised on foreign clients.
Since unregistered lawyers or law firms cannot avail the benefits of export of goods/services, the supplies made by them which are ‘inter-state supplies’, are technically charged to IGST. The IGST liability is then on the supplier of service, not on the recipient on a reverse charge basis.
The Central Government has provided certain exceptions to the taxable services of advocates through a notification. The following advocate services under GST get exemptions in India:
What is Reverse Charge Mechanism?
The primary principle followed in levying Indirect taxes is the collection of tax by the manufacturer, seller or service provider from the consumer of goods or services. The manufacturer or service provider then deposits the tax with the taxation authorities in India after making their output liability adjustment.
An individual-advocate including a senior advocate provides GST rate on legal services. In order to represent a client before any court, tribunal or authority within a taxable territory, these services are liable to be taxable under GST laws in India.
GST on RCM
The RCM on legal services is also applicable when the contract to provide legal services is with another lawyer or law firm. It is also applicable if the provision of services is by another advocate or law firm in taxable territory.
The reverse charge under 'Goods & Services Tax and Legal Services' mechanism puts the liability to pay taxes on the recipient. The Goods and Services tax on legal services received by the client is paid and deposited by the service recipient directly to the government under Section 9(3) of Central Goods and Services Tax Act, 2017 (pdf).
Under the reverse charge mechanism of the GST system for legal services provided by lawyers, they first need to get registered. Like other service providers with an aggregate income of more than Rs. 20 lakhs are levied as GST on legal service fees.
In August 2017, the GST Council clarified that the services provided by lawyers including Senior Advocates and law firms are subject to GST on a reverse charge basis for legal service mechanism. Also, a writ petition was filed by J.K. Mittal and Company challenging the validity of the ‘reverse charge’ mechanism under GST for advocates and GST on law firms.
This has been approved by the GST Council, where the GST on lawyer fees and services would be chargeable. That too under the reverse charge category provided by an individual advocate and a senior advocate.
The placing of lawyers and law firms under the Reverse Charge Mechanism adds to their cost structure. Thus, the GST council meeting clarified that the GST on legal fees in India shall be applicable on the reverse charge basis.
So, the question has been answered by the finance ministry by stating that GST for lawyers in India is to be borne by the clients as RCM on legal services.
Who can help you here?
Need to register yourselves with the GST regime in India? Or are you not sure about the GST on legal services?
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External Links:
[1] Central Goods and Service Tax Act, 2017 - An Act to make a provision for levy and collection of tax on intra-State supply of goods or services or both by the Central Government and for matters connected therewith or incidental thereto.
[2] Service Tax Law - The Government of India, through the Department of Revenue administers the levy and collection of service tax in India. The service tax being an indirect tax, its administrative control is vested with the Central Board of Excise & Customs (CBEC).
[3] Reverse Charge Mechanism - Reverse charge is a mechanism where the recipient of the goods and/or services is liable to pay GST instead of the supplier.
