Litigation cost for companies set to rise: Experts

1/07/2017

PUNE: The cost of litigation for business entities hiring services of lawyers or law firms is bound to go up on account of application of Goods and Services Tax (GST) on a reverse charge basis despite legal services being exempted from it.

Senior lawyer Makarand Deo, who specializes in tax laws, told pune-news.com, "Business entities, whether individual or partnership firms or a body corporate, will be charged GST on the fees paid to individual lawyers or law firms. For instance, a sale deed executed for business purpose will attract GST, but the same for an individual purpose won't. Lawyers normally charge fees as per the amount of litigation. The higher the amount, the higher will be the fees as well as the GST payable by business entity hiring law service."

Deo said, "At the same time, the business entities paying GST on a reverse charge basis will be entitled to a 100% input tax credit. They can claim such credit in their tax return filed in the next month. As such, they will have to bear the cost only for a month. Effectively, there won't be any cost burden for them in the long run."

Govind Patwardhan, another expert in tax laws, said, "Individual lawyers or services provided to an individual client will not be affected considering that legal services have been exempted from GST." As the Centre continued with issuing fresh notifications on the eve of the GST launch, Patwardhan said, "Much also depends on what recommendations the government has accepted. For now, I do not think the cost of litigation in constitutional courts such as Supreme Court and high courts will increase for individual litigants."

According to chartered accountant Dilip Satbhai, legal and medical professions are the only two services which have much to cheer about from the GST considering that they are exempted from it. "However, the reverse charge on legal service hired by companies will take the cost of litigation on a higher side. Firms offering services such as legal process outsourcing (LPO) will fall under the 18% bracket of GST," said Satbhai.

Lawyer S K Jain said, "Section 22 of the GST Act provides that an individual or firm with an annual aggregate turnover of Rs20 lakh and above has to get enrolled with the competent authority and the tax will be applicable accordingly." Senior law academician Mukund Sarda said, "The LPOs into services such as consultancy and drafting will fall under the GST ambit. The cost of justice will rise for corporate litigants."