1. Meaning of Legal Services
Prior to Corrigendum dated 25th Sep 2017,
“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 a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity.
To remove the ambiguity, changes have been made in the definition of Legal Service vide Corrigendum dated 25th Sep 2017.
“Services provided by an individual advocate including a senior advocate or firm of advocates by way of legal services, directly or indirectly, ..”
Explanation: “Legal service” means 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.”
Author Comment – Now Legal Services is not limited to representational services but it also covers any type of advice or consultancy of any law.
2. When will Legal Services provided by an Advocate fall under Reverse Charge?
As per Notification No. 13/2017 –Central Tax (Rate) dated 28th June 2017, there are three conditions which are required to be fulfilled:
Condition 1 – The Service provider should be
- an individual advocate including a senior advocate, or
- a firm of advocates by way of legal services,
Condition 2 - Recipient should be
Any business entity
Condition 3 - Location
Recipient should be located in the taxable territory
3. When is an Advocate required to be registered?
As per NN 5/2017 –Central Tax dated 19th June 2017, Suppliers who are only engaged in making supplies of taxable goods or services or both, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services or both under section 9(3) of CGST Act, 2017 are exempted from obtaining registration.
Since the legal services provided by an advocate are covered under RCM, Advocates are exempted from GST Registration.
4. When are the Legal Services exempt?
As per Notification No. 12/2017- Central Tax (Rate) dated 28th June, 2017 read with Notification No. 2/2018- Central Tax (Rate) dated 25th Jan, 2018, Legal Service are Exempted from GST when,
- A partnership firm of advocates or an individual as an advocate other than a senior advocate, provide the legal service to
(i) an advocate or partnership firm of advocates providing legal services; or
(ii) any person other than a business entity; or
(iii) a business entity with an aggregate turnover up to twenty lakh rupees (ten lakh rupees in the case of special category states) in the preceding financial year; or
(iv) Central Government, State Government, Union territory, local Authority, Government Authority or Government Entity
- 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 twenty lakh rupees (ten lakh rupees in the case of special category states) in the preceding financial year.
(iii) Central Government, State Government, Union territory, local Authority, Government Authority or Government Entity
Important Note: Senior Advocate proving services to Advocate or Advocate firm, services are not exempt.
15. Is it mandatory for recipient to get GST registration?
As per Section 24(iii), persons who are required to pay tax under Reverse Charge shall mandatorily take registration in GST.
Therefore, If Legal Services are not exempt and recipient is located in the taxable territory having business entity then, the recipient shall get himself registered in GST to pay tax under reverse charge.
6. Can the liability under Reverse Charge Mechanism be adjusted through Input Tax Credit?
Any amount payable under Section 9(3) of CGST Act and Section 5(3) of IGST Act, which means Reverse Charge shall be paid by cash only. Reverse charge liability cannot be discharged by using input tax credit.
Now there are certain important queries which we need to analyze.
Q1. If the recipient is not carrying any business but he is taking legal service from an advocate so what is applicability of Reverse Charge and also whether recipient is required to take mandatory registration in this case as per Section 24(iii) of CGST Act?
Ans – No Reverse Charge in this case because recipient is not the specified recipient. As per NN 13/2017, if the recipient is the person who is doing business then the Reverse Charge would be applicable.
Also it is worthwhile to note that in case service is exempt, then there is no question of reverse charge. As per Sr No 45(b)(ii) / 45(c)(ii) of NN 12/2017 as explained above, it is clearly stated that if recipient is a person other than business entity then that legal service is exempt.
Q2. If the recipient is carrying the business but below threshold limit then whether recipient is required to pay taxes under RCM?
Ans – Same as replied above, as per Sr No 45(b)(iii)/45(c)(iii) of NN 12/2017, if recipient is a person having business entity with an Aggregate turnover upto thresh hold limit then legal service is exempt. So again the underlying service is exempt so no question of reverse charge.
Q3. What are the possibilities of reverse charge in case where the Recipient is located in Non Taxable Territory and taking the legal service from an Indian Advocate?
Ans - In case services are provided outside India, then RCM is not applicable as the Business Entity is located outside taxable territory.
However the service is not exempt as per NN 12/2017, hence, now the Advocate is required to take GST Registration. An invoice will be raised in this case. Also, services provided outside India may qualify as Export of Services provided all conditions of Section 2(6) of IGST Act are fulfilled.