Taxing justice

by Talha Abdul Rahman | September 28, 2011

Consistency, coherence, and foresight often evade policy making in India. While on the one hand one comes across forward-looking speeches that promise improved justice delivery, one also comes across policy decisions that enhance the cost of accessing a rather frail justice delivery system. Such decisions are often backed by plenary legislative power and are therefore difficult to challenge in the courts. The legality of a statute however, does not ipso facto guarantee its legitimacy. The imposition of service tax, first on legal consultancy services and later on representational services, is a case on this point.

The implementation of the provisions of the Finance Act, 2011 imposing service tax on representational services provided by lawyers, has been stayed by the Delhi High Court in Delhi High Court Bar Association v. Union of India, in W.P. (C) 2972/2011. Its operation has also been stayed by the High Courts at Guwahati and Andhra Pradesh, in writ petitions filed by the local bar. While it appears that the thrust of the arguments in these cases is on the nobility of the legal profession and its classification as a ‘service’, there are concerns deeper than that, which call for immediate attention.

The imposition of further service tax on ‘legal consultancy services’ in Budget 2011, especially in relation to ‘representational services’ provided by lawyers, is not very different from the ‘misery tax’ imposed on ‘luxury’ hospitals, which has since been rolled back. One can keep wondering what could be luxurious about receiving comfortable treatment from a reputed hospital. One does not choose to go to a hospital; and when one needs to be admitted to a hospital, one has a right to ensure that it is the best within his means.

More often than not, litigants do not have a choice about whether they would like to defend themselves in court. Almost certainly, representational service before courts, tribunals, arbitral tribunals, and before any legal authority is on behalf of a litigant who has been compelled to defend his rights. Given the compulsion to defend one’s right and the expectation of the law that one is required to be vigilant about the enforcement of rights, the imposition of service tax, if an individual is represented by a business entity (say a law firm) or if an individual represents a business entity in defence of his rights, is really akin to a ‘misery tax’. The saving grace is that representational services by an individual to an individual are exempted from the tax. While this appears to be in sync with the ‘aam aadmi’ talisman adopted by the ruling party, the reference to the aam aadmi must logically extend to the ways in which the aam aadmi conducts himself, including his business enterprise, by whatever name called.

Justice - a profit making exercise?

Illustration by Ritwick Roy exclusively for myLaw.net

Qualitatively, there is no difference whether the right that is being defended before a court is that of an individual (and thus exempt from paying service tax) or that of a business entity (and thus obliged to pay the service tax), because it is the quality of ‘right’ that should take primacy. During the Emergency in 1975, it was not the Indian Express Group but Ramnath Goenka who was being targeted through litigations before various fora.

Further, given that the arbitral tribunal is emerging is an alternative to court litigation (mostly because the Indian judicial delivery system is not efficient), to impose a service tax on it really amounts to a tax on efficiency. It would obviously have an adverse impact on the development of the nascent arbitration industry in India.

Admittedly, the government is the most litigious body in the country. The National Litigation Policy (2010) has failed to have any visible impact in the short run. Given the imposition of service tax on representational services, it will now pay the government (by collection of more service tax) to be even more litigious, especially against the business entities. They would be obliged to defend themselves, and engage lawyers and law firms – generating more revenue for the government. This is actually a manner in which the rule of law could be subverted.

One has to always bear in mind that presently, as citizens we deal with babus who often shy away from taking bold decisions or interpretations which favour the ‘assessee’, or the citizen. Worse, one has to often approach the High Courts for mandamus – a mere direction to a babu to perform what is otherwise his duty.

Given the imposition of service tax, it would now be a taxable event when a corporation challenges an illegal and untenable orders passed by various governmental authorities. Since India does not follow a “loser to pay” costs system for all practical purposes, even if the corporation were to finally win the litigation, the costs would not be reimbursed.

Absent the provision of a justice delivery system that is capable of delivering fairly accurate, efficient, and cost-effective justice, the least that government could do is to desist from adopting mechanisms that make it more expensive for persons to access justice. For now, one needs to commend the bar associations for challenging the legality of the imposition of service tax on representational services by lawyers.

Talha Abdul Rahman, Shell Centenary Chevening Scholar at University of Oxford (2008-2009), is an advocate based in Lucknow.