Budget 2009 and the Legal Profession

Normally, when the annual budget is presented in Parliament, lawyers tend to spend a significant amount of time scouring through the fine-print, but essentially with a view to determine its impact on clients. This observation operates with greater force for tax lawyers. However, Budget 2009 that was presented by the Finance Minister Mr. Pranab Mukerjee in Parliament yesterday stands out at least for one reason. Lawyers are likely to go through certain provisions with a fine-tooth comb, more so because the legal profession itself has become the subject-matter of certain tax reforms.

At a broad level, the Budget can be said to represent a mixed bag as far as the legal profession is concerned. One the one hand, it has clarified the tax position regarding limited liability partnerships (LLPs). Although the LLP Act came into effect from April 1 this year, not many LLPs were in fact registered due to uncertainties in the tax regime. This was despite the significant advantages that the LLP structure provides to professionals, particularly in terms of limiting the liability of each partner. The Finance Bill, through some minor tweaks to the definitions of the terms “firm”, “partner” and “partnership” (by including an LLP within them), makes the tax position of an LLP similar to that of a general partnership. In that sense, there is no tax adversity if a group of professionals were to structure their firm as an LLP instead of a general partnership. This would possibly accelerate the process of conversion of various general partnerships, such as legal practices, to LLPs that enjoy the benefit of limited liability of the partners.

While clarification on LLP taxation would encourage lawyers to come together to combine their practices to take advantage of limited liability, another change in the tax law creates disincentives to such combinations of individual legal practices. The legal profession has hitherto successfully stayed outside the ambit of service tax. This is purportedly on the basis that lawyers do not perform a “service”. But, that has now changed with the Budget, as Mr. Mukherjee states by making reference to the previous Finance Minister Mr. P. Chidambaram: “Although there is a school of thought that legal consultants do not provide any service to their client, I hold my distinguished predecessor in high esteem and disagree! As such, I propose to extend service tax on advice, consultancy or technical assistance provided in the field of law.”

The fine-print in the Finance Bill reveals two exceptions to service tax on legal practices: (i) the tax is not applicable to “any service provided by way of appearance before any court, tribunal or authority”; and (ii) the tax is not applicable when the service-provider or recipient is an individual. In other words, the first exception indicates that service tax is not applicable litigation work. Even here, it seems that the exception does not cover all litigation work, but only that which relates to “appearance before the court, tribunal or authority”. On the face of it, while fees levied towards drafting, conferences, pleadings could be within the service tax ambit, this is likely to be the subject-matter of greater interpretation and possible litigation. This would increase the burden on lawyers to maintain details of fees charged towards specific parts of work performed. Moreover, individual lawyers seem to be outside the purview of service tax. In that sense, this may incentivize lawyers to stay as solo practitioners rather than to form LLPs (to avail of the benefits of limited liability) or general partnerships. Having said that, service tax is usually passed on to the recipients of services, in this case the clients, which does not directly affect lawyers but only goes to increase the cost of obtaining legal services.

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  • A new sub-clause zzzm has just been introduced to Section 65 (105) of Finance Act, 1994 that says:

    'service tax on services provided or to be provided to any business entity, by any business entity, in relation to advice, consultancy or assistance in any branch of law excluding appearance before any court, tribunal or authority and the term 'business entity' has been defined to include association of persons, body of individuals, company or firm but not to include an individual'

    I consider that the entire litigation activity is kept out of Service Tax. Obviously, no lawyer could just show up in a Court or a Tribunal without first lodging appropriate papers there. So, all incidental activity such as filing, conferences and the like are therefore, exempted.

    That means, approximately 96% of all registered lawyers in the country are not touched by Service taxes.

    Obviously, the Central Government did not want to rattle the litigating community, what with the Central Government losing several high profile litigation on constitutionality of service taxes – in the last six months alone, it has lost out in various courts, litigation in the area of Shipping industry, Building rental industry and Mobile SIM sales.

  • There could be one another dimension also to this in excluding the litigation work. Normally the designated senior counsels do only the appearance and arguments while the engaging counsel prepare the drafts and papers. Applying the present finance bill, then there is no service tax applicability for the designated senior counsels and the engaging counsel will be imposed tax on the services rendered by him.