Legal services are, and have always been, indispensable for human life and commerce. With the introduction of GST in India, it is only natural that there is interest among many to know how GST applies to legal services. In this blog, we will try to explain the impact of GST on legal-services, the tax liabilities of lawyers and law firms, and their clients. We hope to unravel the complicated realm of GST on advocate’s fees and its impact on you.
GST Meaning and Introduction in India
Before delving into the peculiarities pertaining to GST on legal services, it would be pertinent to first describe the very nature, that is, the goods and services tax itself, and secondly, to know why it was implemented in India.
Goods and Services Tax (GST) is the indirect tax for the supply of goods and services in India. The objective was to bring many indirect taxes under the GST umbrella, namely VAT, service tax, excise duty, and customs duty so that a clear tax structure can be evolved for the sake of economic growth.
India’s GST system is divided into 4 different slabs of tax:
0%
5%
12%
18%
28%
Prior to this, combined statutory taxes in the Indian indirect taxation system used to hover around 26.5 percent, and then post-GST, it has now transformed into these different brackets.
Effect of GST in Legal and Law Services
This has largely changed the concept and overall picture concerning legal services. The introduction of GST significantly affected the world of the legal profession, thus causing an area of much debate.The services rendered under this GST regime by legal practitioners and law firms are chargeable to tax. Many questions remain unanswered concerning the taxation of these services and the party liable to pay the taxes. However, on the other hand, a very general narrative among the old and learned is that this GST will not apply to individual lawyers or law firms. However, in actuality, it has much wider ramifications for the applicability of GST in legal services.
When Does GST Mean Legal Services?
GST is applicable to legal services actually provided to a business entity with an aggregate turnover of Rs. 20 lakh or more, in the previous f.y. GST is also chargeable when senior advocates provide legal services to another advocate or law firm.
Nevertheless, no GST applies to advocates or law firms rendering legal services to an individual or providing services to business entities having an aggregate turnover of less than Rs. 20 lakh in the preceding financial year. There are exceptions to this provision pertaining to legal services rendered by a senior advocate, which are covered under a reverse charge mechanism (RCM).
Reverse Charge Mechanism for Legal Services
GST has that considerable aspect in legal service, which is the reverse charge. Reverse charges mean that it is the recipient of the service who is liable to pay the tax and not the service provider. In this case concerning legal services, the recipient is the client (business entity), who is liable to pay GST on the fees to be paid to the attorney or lawyer.
For example, where a senior advocate renders services to a business, the business entity will pay GST under reverse charge. This also applies to contracts where legal services are rendered to or by other law firms or advocates.
Exemptions for Legal Services under GST
There are some situations when GST on legal services would not be applicable, especially when it is the individual or small business service recipient. These exemptions are as follows:
Legal services provided by law firms or individuals other than senior advocates to an advocate or law firm.
Legal services provided to a business entity with an aggregate turnover of less than Rs. 20 lakh during the previous financial year.
Services provided by a senior advocate to an individual or to a business entity of turnover below Rs. 20 lakh.
Usually, legal services provided by an individual lawyer or law firm to individuals other than business concerns are exempt from GST such as exemptions which are made to ensure that small businesses and individuals are unburdened from taxes.
GST Registration for Lawyers and Law Firms
GST Registration for individual lawyers or law firms rendering legal services does not usually apply to them. Nevertheless, it applies if a lawyer or law firm renders legal services in one state to a client from another state (inter-state supply). In such cases, only GST registration is needed to collect and remit the said tax.
It is also relevant to note that, in case of provision of legal services by the lawyer or law firm to clients outside India, it is required to obtain GST registration to enjoy export benefits under GST because export services are exempt but registration is required to avail such benefits.
GST on International Legal Services
The general phenomenon of obviating applicability of GST on legal services is that when law firms or lawyers provide legal services to clients outside India, these services will not attract GST because these services qualify as “export of service.” The service must, however, satisfy the two conditions of being supplied to a foreign client and used outside India.
For law firms or lawyers providing services to foreign clients, the supplying service would be regarded as “zero-rated,” thus exempted from GST, but for availing of export benefits, the lawyer or law firm must be registered under GST and comply with all necessary documentation and tax filings.
Reverse Charge Mechanism: A Closer Look
Under the reverse charge mechanism, it is the recipient of a service who would assume liability to pay GST instead of the service provider. This form of arrangement is particularly applicable in legal services, where it is the businesses receiving legal advice or representation that are responsible for paying the GST and not the lawyer or law firm providing that service.
Reverse charge mechanism for services rendered by individual advocates (including senior advocates) to business entities. The foregoing will mean that the business will pay GST directly to the government.
Challenges and Consequences for Lawyers and Law Firms
Now, the scenario that has been created as a result of GST on legal services has incited additional costs that businesses have incurred with costs due to hiring legal counsel. Some small law firms are now faced with having to deal with learning the issues surrounding GST. They will also have to find a way to comply with the tax laws. This has now placed an additional burden on businesses-the responsibility of directly managing the payment of taxes.
The good news, however, for lawyers and law firms is that they can claim their input tax credits while being registered for GST and as long as they comply with the relevant provisions. Such input tax credits basically offset the GST levied on their business expenses.
Conclusion
The GST regime with its introduction in India on legal services has offered a diverse set of opportunities and challenges to lawyers, law firms, and their respective clients. By the application of GST, it may appear to be too convoluted; however, exemptions, reverse charge mechanism, and registration requirements can be better handled if properly understood.
Seeking consultation with a professional and experienced tax advisor/lawyer will keep you in line with the compliance of the law if any doubt on GST applicability arises in reference to your legal services or your need is that of GST registration.
MyAdvo renders expert consultation and legal services that tailor to your needs. With a network of over 10,000 lawyers in more than 60 cities, we are there for you to facilitate help and guidance on GST on legal services.
