Director Remuneration — Whether the Dust finally settled.
By Sh. Rajesh K. Arora,
Ex. Superintendent GST, C.Ex. & Customs
The GST liability on Director’s Remuneration has always been a point of contention and rather a point of interpretation and misinterpretation between the Tax payers and Tax Authorities. Although, it was much discussed point in erstwhile Service Tax regime, however, it was resolved during that time. Now, with the implementation of GST in July, 2017, the issue of tax liability on Director’s remuneration has again cropped up with divergent (mis) interpretations by the Tax authorities.
2. Notification No.13/2017–Central Tax (Rate) dated 28.06.2017, lists down the supply of services on which GST is payable under reverse charge by the recipient under section 9(3) of the CGST Act, 2017. One of the services defined in the said notification is at Sl. No. 6, which provides that services supplied by a director of a company or a body corporate to the said company or the body corporate. A director of a company or a body corporate is to be considered as supplier of service and the company or a body corporate located in the taxable territory would be treated as the recipient of service.
3.1 The Authority for Advance Ruling, Rajasthan, has initiated the infamous race of divergent interpretations by passing an order in February, 2020, in the matter of M/s Clay Craft India Pvt. Ltd., Jaipur, wherein, it was ruled that GST under RCM is applicable on consideration including ‘salary’ paid to Director of the company, who are also in the employee-employer relationship. The AAR included those directors in the taxability net who were paid regular salary and PF was deducted on such salary and they were treated as employees of the company. Moreover, their Income Tax Return were filed under the Head “Income from Salaries” and subjected to TDS under Section 192 of the IT Act.
3.2 The AAR, Rajasthan in their ruling observed that
(i) consideration in form of salary and commission paid to the Directors by the company is for the services provided by them (directors) to the company and the company is recipient of such service;
(ii) Consideration paid to the Directors is for the supply of services provided by them to the applicant company and is not covered under para (1) of the Schedule III to the CGST Act, 2017, as the Directors are not the employee of the Company.
(iii) Director is the supplier of services and the company is the recipient of the services. Thus, considerations paid to the Director for the supply of services to the Company is covered under notification No.13/2017–Central Tax (Rate) dated 28.06.2017.
3.3 Thus, the learned AAR has interpreted at their own sweet will that the directors of the company are not employees of the company, without any supporting and corroborative reasoning. The Authority further ruled that consideration in form of salary and commission received by the directors is for the services provided by them (directors) to the company and the company is recipient of such service. Such services are not covered under para (1) of the Schedule III to the CGST Act, 2017, as they (directors) are not the employee of the Company and such services are covered under notification No.13/2017–Central Tax (Rate) dated 28.06.2017.
4. Another Order on the same issue, by the Authority for Advance Ruling, Karnataka in the matter of Anil Kumar Agrawal, in the month of May, 2020, discussed the matter by categorizing two types of the remuneration in their ruling.
(i) First one, when the director is the employee of the company, in such cases, the services of the director, as an employee to the employer, are neither supply of goods nor supply of service in terms of Schedule III of CGST Act 2017.
(ii) The second one is when director (Non-Executive Director) of the company provides the service to the company, in such cases, the remuneration paid by the company is liable to GST under reverse charge mechanism vide Sl. No. 6 of notification No.13/2017–Central Tax (Rate) dated 28.06.2017.
5.1 The CBIC vide Circular No.140/10/2020-GST dated 10th June, 2020, issued clarification in respect of levy of GST on Director’s remuneration. The Circular examined two different categories for leviability of GST on director’s remuneration paid by the companies to the:-
(i) independent directors defined in terms of section 149(6) of the Companies Act, 2013 or those directors who are not the employees of the said company; and
(ii) whole-time directors including managing director who are employees of the said company.
5.2 The said circular clarified that in respect of such directors, who are not the employees of the said company, the services provided by them to the Company, in lieu of remuneration as the consideration, for the said services, are clearly outside the scope of Schedule III of the CGST Act and are therefore taxable. Further, the Director’s remuneration which is declared separately other than “salaries’ and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services shall be treated as consideration for providing services. Thus, the remuneration paid to such independent directors, or those directors, by whatever name called, who are not employees of the said company, is taxable on reverse charge basis, in terms of Sl.No.6 of the notification No.13/2017–Central Tax (Rate) dated 28.06.2017.
5.3 The said circular further clarified that in respect of such director, irrespective of name and designation, who is an employee and all his activities are in the course of employer-employee relation (i.e. a “contract of service”) or having any element of “contract for service”. The part of Director’s remuneration which are declared as “Salaries’ in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.
6.1 Thus, the recent Circular No.140/10/2020-GST dated 10th June, 2020, has clarified the GST liability on the considerations in the form director’s remuneration in different situations. The circular linked working of directors in accordance to the Companies Act and linked TDS deduction of director’s remuneration under the Income tax Act.
6.2 The said circular, however, has finally settled the dust to some extent, which was raised due to different rulings on the basis of divergent interpretations of the Tax authorities i.e. Authority for Advance Ruling on taxability on director’s remuneration. But still the tax payers i.e the companies have to be more cautious, as they have to maintain contract of service (employment) with such directors for ascertainment (by Tax Authorities), that directors were in the contractual relationship of master and servant with the company i.e. under a contract of service and the activities performed by director are in the course of employer-employee relation.
Disclaimer: The views expressed in the article are in the opinion of the author. Although due care has been taken while preparing this article, but some error may creep in and accordingly before taking any action on the basis of this article, it is highly recommended to take note of the GST law first. There is no liability for any loss or damage caused to anyone due to any interpretation or omission.