The Bombay High Court has upheld the levy of service tax on services provided by lawyers and law firms, to their business clients. Thus, business entities who hire lawyers and law firms will have to continue to pay servkice tax and also deposit it with the government.

Since July 2012, a 'reverse charge mechanism' was introduced. Business entities, with a turnover of Rs. 10 lakh or more, have to pay service tax and also deposit the same against the legal fees paid to individual lawyers or law firms. Smaller business entities and individuals do not have to pay service tax when they hire lawyers or law firms. The current rate of service tax is 12.36%.

The Bombay High Court, on Monday, set aside the writ petitions filed by The Bombay Bar Association, Advocates Association of Western India and a few lawyers. The main argument of these petitioners was that lawyers are officers of the court who help in the administration of justice. In the absence of any service being provided, no service tax levy can be imposed. The petitioners had held that the introduction of service tax on legal fees was unconstitutional. While dismissing the petition, the court, referred to the changing role of the legal profession and held it is no longer limited to appearing before the court.

It also pointed out that the classification between legal services provided to business entities and to individuals, for the purpose of levy of service tax, is not discriminatory and does not violate the Constitution. In addition to their key contention, that lawyers are officers of the court and perform a solemn duty in the administration of justice, the petitioners also pleaded that: "The levy of service tax imposes a heavy additional burden on litigants and disables them from approaching the courts." The writ petition also said the service tax provision is unconstitutional because it discriminates between services provided to an individual (where there is no service tax imposition) and to a large business entity which has to bear the service tax burden. The service tax authorities and the government of India who were the respondents to this case, argued that even as lawyers provide assistance in administering justice, they do in fact provide services to their clients and are duly compensated in the form of fees which are charged from clients.

The respondents also argued that representational legal services provided to individuals were kept out of the service tax net to ensure the burden is not borne by the common man. As there was a rational nexus, it was not discriminatory against business entities and this has been the position taken earlier by the Supreme Court. The Bombay High Court observed that the legislature in introducing service tax on the legal profession had noted the commercialization of the practice of law which has expanded in scope and sphere post liberalization and globalization.

At the same time the fact that a lawyer is an officer of the court and part and parcel of the administration of justice was not ignored. "Rather by a rational and intelligible differentiation the Parliament has proceeded to levy and impose service tax on legal services rendered to business entities by an individual advocate or law firm," concluded the Bombay HC and dismissed the writ petitions.