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Lawyers, law firms under ambit of service tax

As Indian legal industry expands, the government has made services provided by business entities to individuals as well as representational and arbitration services by individuals to business entities taxable.

business Updated: Feb 28, 2011 23:50 IST
HT Correspondent

As Indian legal industry expands, the government has made services provided by business entities to individuals as well as representational and arbitration services by individuals to business entities taxable.

This means law firms providing services to individuals will have to pay service tax. Similarly, individuals providing representational and arbitration services to companies or business entities will also be taxed.

But those individuals providing services to other individuals won't be taxed, the finance minister said while presenting the Union Budget 2011-12 on Monday.

Finance minister Pranab Mukherjee said the scope of legal services has been expanded to include these services. The proposals seek to make a distinction between individual advocates and law firms.

"Earlier, litigation and arbitration were exempted from service tax and only corporate advisory was under the service tax net. Now the entire spectrum stands included. Every service provided by law firms would be subject to service tax," Vijay K Sondhi, senior partner Luthra and Luthra told HT.

Mukherjee also provided an additional R500 crore for the improvement of infrastructure facilities in the courts across the country and for setting up rural courts.

The law ministry's total allocation for the year 2011-12 is R1,432 crore, around R500 crore more than R950 crore last year. The central assistance to states for setting up rural courts (gram nyayalayas) in a cluster of villages has been increased from Rs 39 crore to Rs 145 crore.

The UPA government's ambitious plan to set up 5,000 gram nyayalayas across the country has so far been largely cold shouldered by the states, as they want the Centre to spend money for setting up such courts. More than a year after the Gram Nyayalaya Act was notified in October 2009, only 96 such courts have come up in four states.

The Gram Nyayalayas have been given the power to decide criminal cases which carry a maximum punishment of two years and civil cases such as disputes arising on use of common roads and water resources.