GST under Reverse Charge Mechanism (RCM) on Legal Services provided by Advocates

1. Introduction

In this article, we shall discuss about important aspects in regard to the applicability of GST under reverse charge mechanism (RCM) on legal services provided by advocates, under GST Law.

As per Section 2(98) of the CGST Act, 2017 ‘reverse charge’ means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of IGST Act, 2017.

It is pertinent to mention here generally it is the responsibility of the supplier to pay GST to the Government (though he can collect same from customer) which is apparent from sub-section (1) of section 9 of CGST Act / sub-section (1) of section 5 of IGST Act, 2017 wherein the taxable person viz supplier is liable to pay tax.

However such liability for payment of tax is shifted onto the recipient where Government believes it would be administratively efficient and will ensure recovery of taxes and such payment by the recipient is referred to as as payment under reverse charge mechanism.

In accordance to the powers conferred under sub-section (3) of section 9 of CGST Act, 2017 and under sub-section (3) of section 5 of IGST Act, 2017, Notification No. 13/2017-Central Tax (Rate) dated 28-6-2017 and Notification No. 10/2017-Integrated Tax (Rate) dated 28-6-2017 (hereinafter referred to as RCM Notifications) were issued by Govt, notifying the situations wherein certain supply of services would be under ambit of reverse charge mechanism. As on date 22 services are under ambit of reverse charge mechanism vide above cited notifications.

Legal Services by Advocates is amongst the notified services wherein the tax is required to be paid by the recipient of such services under reverse charge mechanism. It is not new that legal services have been brought under levy of reverse charge as same was within ambit of reverse charge under Service Tax law as well.

2. Situations where GST under reverse charge mechanism (RCM) will apply on legal services

The legal services would be covered under the ambit of reverse charge mechanism, if and only if all the following four conditions are satisfied.

a). Services supplied should be legal Services

As per the RCM Notifications, Legal service means any service provided in relation to advise, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.

The above definition is of wide connotation and will include not only representational services of advocate but also any service provided in relation to advise, consultancy or assistance in any branch of law. In view of the broad definition the following services taken from Advocate would be covered within the expression ‘legal services’:

1. Preparation and / or filing of Income Tax Returns.
2. Preparation and / or filing of ESIC / PF returns.
3. Obtaining any advice / opinion on Income tax matter or any law.
4. Filing of any suit.
5. Conference Charges.
6. Hearing Charges etc

b). Legal Services should be provided by Advocates

As per the RCM Notification(s), services provided by an individual advocate including a senior advocate or firm of advocates by way of legal services is covered under reverse charge mechanism. Thus legal services provided by other persons like Chartered Accountants or professionals other than Advocates would not be under reverse charge and in such cases the CAs will have to charge GST from their clients and deposit same under forward charge mechanism.

In this regard it is important to note that as per Explanation (e) to RCM Notification(s), a limited liability partnership (LLP) formed and registered under the provisions of Limited Liability Partnership Act, 2008 shall also be considered as partnership firm or a firm. Accordingly legal services provided by LLP of Advocates, would also be covered under reverse charge mechanism.

Further it is important to note that only the legal services obtained from an Advocate are subject to reverse charge. Thus in case any Advocate has any office and he gives the same on rent, then in such cases reverse charge mechanism will not apply.

Meaning of Advocate

As per para 2(b) of exemption Notification No. 12/2017-Central Tax (Rate) dated 28-06-2017, ‘advocate’ has the same meaning as assigned to it in clause (a) of sub-section (1) of section 2 of Advocates Act, 1961, which is reproduced below.

      (a) “advocate” means an advocate entered in any roll under the provisions of this Act;

Further as per para 2(zzd) “senior advocate’ has the same meaning as assigned to it in section 16 of the Advocates Act, 1961. The said Section 16 is reproduced below for ready reference of the readers:

16. Senior and other advocates.—

(1) There shall be two classes of advocates, namely, senior advocates and other advocates.

(2) An advocate may, with his consent, be designated as senior advocate if the Supreme Court or a High Court is of opinion that by virtue of his ability standing at the Bar or special knowledge or experience in law he is deserving of such distinction.

(3) Senior advocates shall, in the matter of their practice, be subject to such restrictions as the Bar Council of India may, in the interest of the legal profession, prescribe.

(4) An advocate of the Supreme Court who was a senior advocate of that Court immediately before the appointed day shall, for the purposes of this section, be deemed to be a senior advocate:

Provided that where any such senior advocate makes an application before the 31st December, 1965 to the Bar Council maintaining the roll in which his name has been entered that he does not desire to continue as a senior advocate, the Bar Council may grant the application and the roll shall be altered accordingly.

c). Legal Services should be provided to any business entity located in the taxable territory, directly or indirectly

As per RCM Notifications, the recipient of service should be any business entity located in the taxable territory in order to trigger the provisions of reverse charge mechanism. Further as per Explanation (c) of the said Notification(s) the business entity located in the taxable territory who is litigant, applicant or petitioner, as the case may be, shall be treated as the person who receives the legal services for the purpose of this notification.

It is important to note here that only the expression ‘litigant’, ‘applicant’ or ‘petitioner’ has been used here whereas the term legal services was defined broadly and could also cover services like filing of income tax returns within its ambit.

It seems difficult that recipient of services of filing of ITR would be covered under any of the above three expressions. However despite above, it is advised that tax may be paid under reverse charge on conservative basis, especially where input tax credit thereon can be availed.

Further the taxable territory means India, where the GST law are applicable. Thus in cases where the recipient is located outside India, in such cases reverse charge mechanism would not be applicable. Rather in such cases which may be zero rated supply, subject to fulfilment of conditions (Section 2(6) of the IGST Act) the Advocate needs to comply with GST law.

Meaning of Business Entity

As per para 2(n) of the exemption Notification No. 12/2017- Central Tax (Rate) dated 28-06-2017, ‘business entity’ means any person carrying out business. Thus for understanding the term business entity we need to read the definition of person and business collectively.

The expression ‘person’ has been defined under Sec 2(8) of the CGST Act, 2017 as under:

(84) “person” includes—

(a) an individual;

(b) a Hindu Undivided Family;

(c) a company;

(d) a firm;

(e) a Limited Liability Partnership;

(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;

(g) any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in clause (45) of section 2 of the Companies Act, 2013;

(h) any body corporate incorporated by or under the laws of a country outside India;

(i) a co-operative society registered under any law relating to co-operative societies;

(j) a local authority;

(k) Central Government or a State Government;

(l) society as defined under the Societies Registration Act, 1860;

(m) trust; and

(n) every artificial juridical person, not falling within any of the above;

Further the expression ‘business’ has been defined under Section 2(17) of the CGST Act, 2017 which is reproduced below:

(17) “business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

(h) services provided by a race club by way of totalisator or a licence to book maker in such club ; and

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

From above it is evident that term business entity is of wide connotation as even a single transaction in nature of trade, commerce etc is sufficient to make a person a business entity, in view of specific mention in definition of business that volume, frequency, continuity or regularity of transaction is immaterial.

Legal Services provided directly or indirectly

It is interesting to note that use of term ‘directly or indirectly’ has not been made in any of other services notified under reverse charge mechanism, except in case of legal services. Considering the fact that the legal intention is to cover litigant, applicant or petitioner under reverse charge we can understand the use of expression ‘directly or indirectly’ with help of following example:

Example:

X Ltd has to file an Income Tax suit before Delhi High Court, it requests its CA to appoint / suggest suitable Advocate and the CA on behalf of X Ltd appoints a reputed advocate for filing and representation of case of X Ltd before the High Court. This is a situation where legal services are provided indirectly to X Ltd and would be squarely covered under reverse charge. It is important to note here that in such case the litigant / petitioner is X Ltd and not the CA and thus tax will be paid under RCM by X Ltd.

In this regard it is suggested that whenever, an Advocate is appointed through CA, it should be ensured that invoice should be issued by Advocate in name of the ultimate recipient of the legal services viz litigant, applicant or petitioner, in order to avoid any confusion regarding payment of taxes under reverse charge mechanism.

d). Legal Services should not be exempt

As per Entry No. 45(b) and (c) of exemption Notification No. 12/2017- Central Tax (Rate) dated 28-06-2017 the following legal services from Advocates are exempt from GST.

Services provided by-

(b) a partnership firm of advocates or an individual as an advocate other than a senior advocate, 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 an aggregate turnover up to such amount in the preceding financial year as makes it eligible for exemption from registration under the CGST Act, 2017.

(iv) the Central Government, State Government, Union territory, local authority, Governmental Authority or Government Entity;

 (c) a senior advocate by way of legal services to-

(i) any person other than a business entity; or 

(ii) a business entity with an aggregate turnover up to such amount in the preceding financial year as makes it eligible for exemption from registration under the CGST Act, 2017

(iii) the Central Government, State Government, Union territory, local authority, Governmental Authority or Government Entity

In view of above, even if a person is a business entity it will not be required to pay GST under RCM on legal services, in case such person is not required to obtain registration unde Section 22(1) of the CGST Act, 2017 due to its aggregate turnover in previous year being less than Rs 40 lakh/Rs 20 lakh/ Rs 10 lakh. However in case such a person has obtained voluntary registration, reverse charge provisions will be applicable.

Further RCM will also not be applicable in cases where any individual not carrying any business has obtained legal services, as same is also exempted.

3. Which tax is to be paid under reverse charge mechanism

The tax viz CGST + SGST / UTGST or IGST that is required to be paid under reverse charge mechanism on legal services from advocate would depend upon as to whether the supply is an inter-State supply of intra-State supply.

As per Section 7 and 8 of the IGST Act, a supply is regarded as inter-State supply wherein the location of supplier as well as place of supply, are in same State / UT. In case these are in different State / UT, same is treated as Inter-State supply.

Location of Supplier of Advocate

As Advocate are not liable to take registration under GST law as their entire services are under RCM or else are exempt, the location of supplier as per Sec 2(71) of the CGST Act, 2017 would be the location of fixed establishment (i.e. where office of Advocate is located) from which supply is made or usual place of residence of the Advocate.

Place of Supply of Legal Services

Considering the Advocate as well as the recipient are located in India, the place of supply of legal services would be the location of the recipient (registered person) as per Section 12(2)(a) of the IGST Act, 2017.

In case the supply is inter-State supply, IGST shall be applicable else CGST + SGST / UTGST shall apply, which needs to be paid by recipient under RCM on legal services. Let us understand this with help of following example.

Example:

Mr A an Advocate located in Noida (UP), appointed by a Company X Ltd, registered under GST law, located in Mumbai (Maharashtra) to appear in an Income Tax case before Supreme Court, New Delhi.

In this case the location of supplier is Noida (UP) while the place of supply is Mumbai, Maharashtra and thus X Ltd will be required to pay IGST on the legal charges claimed /paid by/ to the Advocate.

4. Rate of GST applicable on legal services from Advocates:

Legal Services from advocate are exigible to GST rate of 18%. Thus in case of intra-State supply, CGST @ 9% and SGST @ 9% will be applicable. On the other hand IGST @ 18% will be applicable on inter-State supplies.

5. When GST under RCM is to be paid on legal Services from Advocates

The liability for payment of tax, in this case, will be determined as per Section 13(3) of the CGST Act, 2017 wherein provisions regarding determination of time of supply of services covered under RCM are mandated.

According to provisions of Section 13(3), the time of supply for purposes of payment of tax under RCM, would be earlier of:

Example:

While determining the time of supply of services covered under the reverse charge mechanism the date of supply is not relevant and thus the date of hearing in court is to be ignored. The time of supply is computed as under:

Case 1:

Time of supply will be the date of payment i.e. 10-05-20XX or 61^st day from the date of invoice i.e. 07-06-20XX, whichever is earlier i.e. 10-05-20XX. Accordingly, tax, in this case, would be required to be paid by 20^th/22^nd/24^th of June, 20XX with filing of GSTR-3B in case of normal assessees.

Case 2:

Time of supply will be the date of payment i.e. 10-07-20XXor 61st day from the date of invoice i.e. 07-06-20XX, whichever is earlier i.e. 07-06-20XX. Accordingly, tax, in this case, would be required to be paid by 20th/22nd/24th of June, 20XX with the filing of GSTR-3B in case of normal assessees.

6. Payment of GST under Reverse Charge Mechanism

As per section 49(4) of CGST Act’2017, ITC can be used for payment of output tax only. Therefore tax under reverse charge can be paid through cash only without availing the benefit of ITC. In case the supply subject to RCM is supplied by a registered supplier , he must mention in his invoice that tax is payable on reverse charge.

7. Availing of Input Tax Credit of GST paid under RCM on legal service from Advocates:

In case the legal services were obtained for business purposes / taxable supplies, input tax credit in respect of tax paid under reverse charge mechanism can be availed as per Section 16 of the CGST At, 2017. However it is important to note that in such a case a self invoice as mandated under Section 31(3)(f) of the CGST Act,2017 will have be raised by the recipient as the advocate would not be registered under GST Law.

To know about issue self invoice: CLICK HERE

It may be noted that as per Rule 36, in above cases input tax credit can only be availed on basis of a self invoice, subject to payment of tax. Therefore issuance of self invoice is of critical importance.

8. Concluding remarks

Legal services from advocates have been under domain of reverse charge mechanism since times of Service tax law. In view of broad definition of ‘legal services’ under GST law any services connected with any law would be regarded as legal services , which need to be taken care of by the recipient. Further for purpose of availing ITC, on GST paid under RCM on legal services, it should be ensured that self invoice as mandated under section 31(3)(f) of the CGST Act,2017 is issued by the recipient.

Further time of supply as discussed should also be taken care of by recipient, in order to make timely payment of tax under RCM on legal services and avoid levy of any interest.

***

Don’t miss the next Tax Update / Article / Judicial pronouncement

Subscribe to our newsletter from FREE to stay updated on GST Law

Resolve your GST queries from national level experts on GST free of cost.

CA. Mohammad Salim

CA. Mohammad Salim is an ICAI award winning Chartered Accountant having rich experience of more than 20 years in the field of indirect taxes. He is the Member, Indirect Taxes Committee of PHD Chamber of Commerce and Industry. He is author of four successful books on GST published by Taxmann Publication and is also GST expert on taxmann portal.