Service tax on law firms not to yield much

The Centre’s move to bring services provided by law firms under the tax net is unlikely to yield significant revenue for the exchequer.

The legal consultancy market today is estimated to be at somewhere between Rs 400 crore and Rs 500 crore and an imposition of service tax would bring in about Rs 50 crore to the government.

So far, legal services in the country were outside the ambit of service tax, but the finance minister in his Budget speech on Monday announced to extending service tax to advice, consultancy or technical assistance provided in the field of law.

This tax, however, would not be applicable if either the service provider or the service receiver is an individual. Also exempted are services before courts. So, what would be taxed is only advice or opinion.

According to experts, though legal consultancy is a huge market, 95 per cent of this would be individuals, while 5 per cent would comprise firms, which means not a significant amount of revenue. The basic idea behind the move to bring legal consultancy firms in the service tax net is to bring consistency and uniformity in all services like auditing. Legal consultancy services are liable to pay service tax across the world.

“It is a move on expected lines to broaden the tax base because all services would be liable to tax barring a few essential services when the country moves towards goods and services tax (GST) regime,” said Pratik Jain, executive director, indirect taxes at KPMG.

According to some legal experts, the impact of service tax imposition won’t be significant, as the legal consultancy firms form a small minority. Besides, the pressure would be on the consumer of services, like business establishments, on which the firms would pass the burden of tax.

A section of legal consultants in the country has opposed the government move to levy service tax on consultancy firms saying that it distinguishes between individual lawyers and law firms. “This is not a positive move,” said Anoop Narayanan, partner at Majmudar & Co International Lawyers. “Firstly, it distinguishes between individual lawyers and law firms. Secondly, law is still regarded as a profession in India, and not a business. Therefore, imposing service tax on law firms will create an additional burden on companies availing legal services,” added Narayanan.

According to another Delhi-based legal consultant who didn’t want to be identified, it is the complexities of service tax audit that people want to avoid paying service tax. Moreover, he added that firms would find ways to bypass this tax as individuals service providers and receivers are not being taxed.