• Mar
  • 20
  • 2012

Are Directors Liable To Service Tax And Tax Audit As Per Union Budget 2012-13?

CA Prashant Gupta

Till the date of budget, there is always confusion on treatment of director’s remuneration. There is conflict about whether it is salary income or it is a business income chargeable under the head business and profession.  In this union budget, we have got a new clause u/s 194(J) that is 194(J)(1)(ba) that defines Any remuneration or commission paid to director of the company are liable to tax deduction at source at the rate of 10%. In my point of view, this will end the debate on TDS liability on director remuneration.

Now, Section 194(J) is considered for profession and technical services. By inclusion of director remuneration, it signifies that remuneration or commission paid to directors must be professional services. Then director remuneration must be considered as business income while classification of income.

If government intent to consider the director remuneration in business income, then 2 questions arises:-

  1. If director remuneration exceed the limit u/s 44AB i. e. 25 lacs Rupees, whether directors are liable to Tax Audit in their individual capacity?
  2.  By introduction of negative list of service tax, whether services provided by the directors to the company are comes in the net of service tax?

As we all know, if the turnover of any professional cross the threshold limit u/s 44AB i.e. 25 lacs for AY 2013-14, he is liable to tax audit. By inclusion of director remuneration in professional and technical services for TDS purpose, it is clear that government intent to charge such income in the head of Income from business and profession. Then section 44AB becomes applicable to such entities and even if any person is getting only director remuneration from any company which exceed the threshold limit may liable to tax audit.

Our second point of discussion comes from negative list of services, which is exempt from service tax. Till date, we have list of services that are taxable to service tax. Now by introduction of negative, any services provided by any service provider unless exempt in negative list is taxable under the net of service tax. Now under the income tax act, we are considering the director remuneration as a result of professional services provided by director to the company. Now my point of view is that, if director remuneration exceeds the threshold limit of service tax, then whether director is liable to pay the service tax as he is providing professional services to the company.

If we considering that point of view, then it will be create a problem in compliance of law. In present, even a middle scale company pays director remuneration to a single director which will exceed the limits of tax audit and service tax. Assume if such interpretation is considered what will happen, every director of the company will get a separate service tax number and he have to get tax audit report even if he is only a director in the company. In case, he is director in more than one company and total director remuneration will exceed the limits then also he has to get service tax number and get his books audited.

Government should come with the clarification otherwise another debate will start.

Thanks & Regards

CA Prashant Gupta

Email:- caprashant1988@yahoo.com


15 Responses to “Are Directors Liable To Service Tax And Tax Audit As Per Union Budget 2012-13?”

  1. Krishan says:

    In the Companies Act , sitting fee and commission are considered as part of remuneration and it also provides the maximum limit of that . Moreover , there are decided cases that in case a director has professional and provides any services out of that profession then it will not be considered as a part of remuneration and will not be counted in the limits provided by the act. Thus in my opinion , what ever a director gets only because of its relation with the company as a director only , not as of any other capacity , will be considered as part of his remuneration out of employment as he has contracted to serve on the Board and consented to attach himself as a employee with the company and gets all the praise for the successful running of the company . Thus on the sitting fee and commission as it is treated as remuneration it will not attract service tax. However in case a director provides any other services out of his professional or other capacity which is not included in the remuneration will attract services tax.

  2. Hiren Deputy says:

    Dear Prashant sir
                                     any partnership firm can pay commission to Partners ? 

  3. S. S. CHOUHAN says:

    whether threshold limit of Rs. 10 lacs is applicable while calculating the service tax on Director Remuneration as remuneration received by the particular director from one company or many companies ? example :- Mr. XYZ has received the director remuneration of Rs. 8.50 lacs in the f.y. 2012-13. So whether company is liable to pay service tax or not?

  4. NILESH C BHATT says:

    DEAR SIR, MY QUESTION IS THAT A DR. WHO IS RECD. ABOVE 20 LACS FEES ON TECHNICAL SERVICES/PROFESSIONAL SERVICES FROM PRIVATE LIMITED HOSPITAL.
    HIS TDS DEDUCTED U/S. 194J THAN IT IS COMPULSORY FOR HIM FOR AUDIT OR HE CAN FILE ITR1.
    PLEASE GIVE ME THE SUGGETION REGARDING THIS URGENT.

  5. KVS Prasad says:

    Mr.Prasant  as per the new service tax rules w.e.f.1.7.2012 the commission /directors fee/bonus/Company Car/travel reimbursement the service tax is applicable since Payment to Directors not excluded and thus taxable this is clarified by the CBEC on 13.7.2012.  But what about the commission paid for 2011-12 whether ST applicable or not i.e. prior to 1.7.2012 

  6. Jayesh says:

    whats the view of house on applicability of service tax under the scenario.

  7. Jessica says:

    when do these provisions become applicable?

  8. B.Chakrapani says:

    Read. Thought provoking issue dealt very lucidly.

  9. amit kedia says:

    Dear Mr. Prashant, Please note that “In section 194J of the Income-tax Act, in sub-section (1), after clause (b), the following clause
    shall be inserted with effect from the 1st day of July, 2012, namely:—
    “(ba) any remuneration or fees or commission by whatever name called, other than those on
    which tax is deductible under section 192, to a director of a company”
    Hence only those directors who are getting remuneration not forming part of salary are covered.This was also pointed out by Mr. Sriram And Mr. Jitin. Thanks.

  10. NILESH says:

    DEAR SIR GOOD MORNING MY QUESTION IS PREVIOUS YEAR F.Y.2010-2012 44 AD SECTION AUDIT PROPRIETOR SHIP BUSINESS IN THIS YEAR  F.Y.2012-2012 I HAVE AUDIT 44AD SECTION IN THIS CASE TDS LIABILITY  RULES FOR INTEREST AND COMMISSION PAYABLE . 

  11. Jitin says:

    And there are ceilings on the maximum amount of sitting fees that may be paid to the directors, and there is hardly any scope for sitting fees to reach tax audit level.

  12. Jitin says:

    Only payments covered under section 192 are to be excluded for the purposes of section 194J, other payments to directors such as sitting fees require deduction @ 10% under section 194J 

  13. sriram says:

    It has been clearly mentioned in the amendment that only those payments which are not covered u/s 192 only will be liable for TDS u/s 194J

  14. Prashant Gupta says:

    Dear Mr Amit,
    Please refer newly introduced section 194(j)(1)(ba), it clearly state that any remuneration or commission paid to director (does not define whether executive or non executive) will be liable to TDS at rate of 10%.

  15. amit kedia says:

    Mr. prashant, Union Budget made it applicable to dedcut tds on payment top directors, however, if the director is receiving remuneration as salary being an executive director of the company then in such case it wont be a case of 194j it will still form part of salary for the directors.
    This is basically brought on the paper to
    bring out the certainty of applicability of TDS on payment to non executive directors like sitting fees, commission etc.
    Hence, tax audit will be applicable only for non executive directors if income exceeds Rs. 25 lacs.
    Thanks

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