The Supreme Court on Monday stayed the Bombay High Court’s judgment that upheld the levy of service tax on services provided by lawyers and law firms to business clients with turnover of Rs 10 lakh and more.
A bench headed by Chief Justice HL Dattu while issuing notice to the ministry of finance, the Director General of Service Tax, Central Board of Excise and Customs, and others stayed the HC judgment on the petition filed by the Bombay Bar Association challenging the levy of service tax on lawyers, which was imposed with effect from May 1, 2011, and was changed to reverse charge (obligation was shifted to business entities from July 1, 2012). The issue pertains to the 14-month period between May 1, 2011, and July 1, 2012.
Business entities with a turnover of Rs 10 lakh or more were asked to pay service tax and also deposit the same against the legal fees paid to individual lawyers or law firms. Smaller business entities and individuals did not have to pay service tax when they hire lawyers or law firms. The current rate of service tax is 14%. Various other HCs had stayed the levy of tax on services provided by lawyers and law firms to business clients.
The association in its petition before the SC stated that such levy will impede the ability of litigants to have access to the system of administration and delivery of justice. “The relationship between an advocate and a litigant before the court of law is not that of a service provider and service recipient but that of a representative of a litigant,” it said, adding that the tax provision is unconstitutional because it discriminates between services provided to an individual (where there is no service tax imposition) and to a large business entity which has to bear the service tax burden.
The HC while dismissing petitions filed by the Bombay Bar Association, Advocates Association of Western India and a few lawyers had referred to the changing role of the legal profession and held that it is no longer limited to appearing before the court.
The HC observed that the legislature in introducing service tax on the legal profession had noted the commercialisation of the practice of law which has expanded in scope and sphere post liberalisation and globalization. “Rather by a rational and intelligible differentiation the Parliament has proceeded to levy and impose service tax on legal services rendered to business entities by an individual advocate or law firm,” the HC stated in its December 15 judgment last year.
