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August 28, 2024

Viraaj Vashishth

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GST on Legal Services under RCM

India’s indirect tax structure has been overhauled by Goods and Services Tax (GST) that eliminated multiple taxes and established a single umbrella tax. It covers a large number of goods and services, including legal services. However, the RCM provides for special provisions stating the GST on legal services. This post contains an analysis of how GST is applied to legal services within RCM.

What is RCM?

The Reverse Charge Mechanism (RCM) under the Goods and Services Tax, GST system, in India, is a provision and part of the general GST system. In every general GST scenario, the supplier collects GST from the recipient and deposits it with the government. However, in the case of RCM, the recipient will directly pay GST applicable on the goods or services directly to the government, instead of paying it to the supplier. Essentially, RCM typically applies to certain specified goods and services or where the supplies are unregistered suppliers.

Comprehending Legal Services in the Context of GST

The term “legal services” includes different activities performed by lawyers such as advice giving, consultancy work, and representation before courts. These fall under SAC Code 9982 which comprises legal and accounting services with the specific HSN code for legal being 998213.

Service Description	SAC Code	HSN Code	GST Rate
Legal Consultancy and Advisory Services	9982	998213	18%
Representation in Courts by Advocates	9982	998213	18%
Drafting of Legal Documents	9982	998213	18%

Specific HSN Codes for Legal Services

GST on Legal Practitioners

The legal practitioners who are subjected to GST include individual solicitors, senior advocates and legal firms. Although these lawyers provide services that are liable to GST, most of the time they aren’t directly responsible for remitting the taxes. Instead, in many cases, when it comes to purchasing legal services one needs to pay a GST under RCM.

Some exemptions exist pertaining to legal fees. For example, if non-business organizations receive legal advice or other assistance in relation to their activities that have no commercial element then these types of services may not require tax payment. However, in case the turnover of business entities exceeds certain threshold limits – they should apply GST on RCM.

Legal Basis for RCM under GST Law

The statutory basis for Reverse Charge Mechanism (RCM) is provided by Sections 9(3) & 9(4) of CGST Act, 2017. In this regard, these sections empower the government to prescribe certain supplies where such provisions would be applicable. The provision covers such things as legal services according to Notification No:13/2017-Central Tax (Rate), dated June 28th 2017. Accordingly, this notification obligates any corporate enterprise receiving professional representation from an attorney-at-law to remit his/her service tax liability through reverse Charge Mechanism (RCM).

Situations Where RCM can be Applied

RCM application is done to various goods and services including that of legal services. Under RCM, when a registered advocate or a legal firm provides any service to business entity, the liability to pay GST would be on the recipient.

GST on Legal Services under RCM

Notification and Applicability

The applicability of GST on legal services under RCM arises from Notification No 13/2017 whereby any legal service provided by an advocate or a firm of advocates to a business entity attracts GST under RCM. This provision became effective as of July 1, 2017, and it applies to all registered business entities.

Persons Liable to Pay GST under RCM for Legal Services

Liability for payment of GST in relation to the provision of legal services does not fall upon the service provider but rather onto the person receiving such assistance. These include:

Service Provider	Service Recipient	GST Applicability	Who Pays GST?	RCM Applicable?
Individual Advocate	Business Entity (Registered)	18% (CGST + SGST or IGST)	Business Entity (Recipient)	Yes
Law Firm	Business Entity (Registered)	18% (CGST + SGST or IGST)	Business Entity (Recipient)	Yes
Individual Advocate	Non-Business Entity/ Individual Consumer	Exempt	Not Applicable	No
Advocate (Inter-State Service)	Business Entity (Registered)	18% IGST	Business Entity (Recipient)	Yes
Advocate	Government Body/ PSU	18% (CGST + SGST or IGST)	Government Body/ PSU	Yes

GST on Legal Services

The standard GST rate of 18% applies to legal services under RCM. In this regard, the tax structure consists of either Central GST (CGST) and State GST (SGST) for intra-state transactions or Integrated GST (IGST) for inter-state transactions. The service recipient will be responsible for accounting for and remitting the appropriate amount of GST based on the place of supply.

Registration and Compliance Requirements

In cases where legal practitioners provide services that are under RCM, they are exempted from registering for GST. This is because, when such a person receives services, he/she becomes liable to meet their payment obligations concerning goods and services tax. However, even if a legal practitioner provides non-business entities with services or partakes in other taxable activities not described in RCM, they may yet have to register themselves under GST.

The RCM Recipient’s Duties

Several obligations of compliance are expected from the recipient of legal services under RCM:

1. GST Registration: For discharging the tax liability under RCM, a recipient must be registered under GST.

2. Time of Supply: Services under RCM are taxable at the time of payment or receipt, whichever is earlier.

3. Filing of GSTR-3B: The monthly GSTR-3B return submitted by the recipient must have a tax liability and timely payment of GST.

4. Claiming Input Tax Credit (ITC): A receiver can claim ITC after paying off GST subject to eligibility.

Input Tax Credit (ITC) on Legal Services under RCM

For example, a person who pays GST for legal services can claim it as an input tax credit (ITC), provided that such services are used in his/her business and other conditions laid down in Section 16 of the CGST Act are complied with. However, blocked credits under Section 17(5) cannot be claimed including those relating to personal expenses which do not qualify.

To claim ITC, necessary proofs such as invoices and payment vouchers should be kept by the recipient showing GST paid on an RCM basis. The claims for ITC must be made within specified deadlines prescribed in the applicable GST law, usually during one financial year only.

Case Studies/Examples

Example 1: Intra-State Legal Service

Suppose a legal service is provided by a solicitor in the same state where the business is located. The business entity as a receiver must pay CGST and SGST on the advocate's fee to discharge its GST liability under RCM.

Example 2: Inter-State Legal Service

In cases where an advocate from one state provides legal services to a business entity from another state, IGST should be paid by business entities for lawyers’ fees thus discharging GST liability under RCM.

Example 3: Legal Services to Government Entities

When there is rendering of any legal services to a government agency, it is always due to this fact that GST has to be paid under the Reverse Charge Mechanism (RCM). However, if registered advocates or law firms provide legal services to such government agencies then they should register for GST law also.

Conclusion

In conclusion, taxation of legal services especially through the reverse charge mechanism adds another level of complexity both to providers and receivers. Whenever their work falls within the RCM ambit, legal practitioners are mostly exempted from GST registration and compliance making the burden shifted onto recipients. Companies must ensure they comply with all requirements related to registration for tax payment purposes as well as reporting when sourcing for legal services. To remain compliant therefore you must keep abreast of changes in Gandhian philosophy which still keeps evolving.

FAQs

1. Explain what GST entails on legal services.

GST on legal services means Goods and Services Tax which is imposed on the services rendered by lawyers and law firms. Legal services attract an 18% tax under GST, which may be payable in certain cases under the Reverse Charge Mechanism (RCM).

2. How does work regarding RCM on advocate fees under GST?

Under the Reverse Charge Mechanism (RCM) of advocate fees, the recipient of the legal service is liable to pay GST instead of the service provider (advocate). What this implies is that usually, a business entity or governmental body becomes liable to pay GST at applicable rates.

3. What is GST on lawyer fees compliance?

The rate for lawyer fee GST is 18%. This includes Central GST (CGST) of 9% plus State GST (SGST) of 9% for intra-state services or Integrated GST (IGST) in case of inter-state supply.

4. How should the HSN code be described as far as legal services are concerned?

For purposes of classification and taxation under GST, the HSN code for legal services is 998213. It identifies those services relating to rendering advice, representation before courts and drafting documents which are taxable under the CGST Act.

5. Give the SAC code for legal services done under GST.

The SAC code for legal services is 9982, which includes various services in the field of law and accounting like consultation, advice and representation in legal matters.

6. When is RCM applicable on GST on legal services?

GST on legal services is charged under RCM when they are rendered to business entities or government bodies registered under GST. In such cases, it is the receiver of service who should pay for the taxes involved.

7. Can a business claim ITC on GST paid for legal services under RCM?

Certainly yes, ITC can be claimed by a business that has paid GST concerning its purchase of legal services under the Reverse Charge Mechanism (RCM) provided the legal services were used for business purposes and other conditions for claiming ITC are met.

8. Does GST apply to non-business entities providing legal services under a reverse charge mechanism?

No, generally speaking, GST does not apply to non-business entities or individuals providing them with legal assistance through the reverse charge mechanism (RCM). The RCM provisions mostly pertain to services offered to companies and other businesses by vendors plus public administrations.

9. What are the documents required to claim ITC on Advocatory Services through RCM?

Maintaining proper documentation such as invoices and payment vouchers showing the GST paid is critical for businesses that would like to claim ITC on legal services under RCM. Concerning filing GST returns and claiming ITC, these papers are considered compulsory.

10. How much will it cost my business if we don’t comply with GST on Lawyer Services under RCM?

Some penalties for non-compliance with GST as far as lawyers are concerned could be in the form of fines, interest on unpaid tax and disallowance of Input Tax Credit (ITC). The businesses have to make sure they pay timely and accurately report their GST or else face these penalties.

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