Budget Withdraws Service Tax Exemption on Legal Services

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In Budget 2016, Finance Minister Arun Jaitley has proposed to levy a 14% tax on the services of a senior advocate to an advocate or partnership firm, and a person represented on an arbitral tribunal to an arbitral tribunal. This would be levied under a forward charge. The Budget, therefore, withdraws tax exemptions given to lawyers.

The proposal has been criticised by lawyers who believe this goes against the intention to make India a hub for arbitration, in line with Singapore and London.

Service Tax has become a key focus area for the Ministry of Finance. Last year’s budget had the Finance Minister increase the Service Tax rate to 14% from 12.36%, which was made applicable from June 1, 2015. Thereafter, Swachh Bharat Cess of 0.5 per cent was added in Service Tax from November 15, last year. Now the limit of 14.5 per cent of Service Tax has been proposed to be increased by 0.5 per cent, in 2016-17 budget proposals, by imposing 0.5 per cent of Krishi Kalyan Cess. The new rate of 15 per cent of Service Tax is slated to come into effect from June 1, 2016.

The government is expected to raise the service tax rate to 17% to 18% over the next two to three years, by which time it will be replaced by the goods and services tax (GST).

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