Taxability of Director Sitting Fees: Interplay Between Companies Act, 2013 & CGST Act, 2017

Summary: The Goods and Services Tax treatment of director sitting fees depends on the nature of the services rendered and the relationship between the director and the company. Under Section 197(5) of the Companies Act, 2013, companies may pay directors sitting fees for attending Board and Committee meetings, subject to the prescribed ceiling of ₹1,00,000 per meeting under Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. These payments are excluded from the overall managerial remuneration limits under Section 197(1). For GST purposes, Entry 1 of Schedule III to the CGST Act, 2017 excludes services provided by employees to employers in the course of employment from the definition of supply. However, sitting fees paid to non-executive and independent directors, who generally do not have an employer-employee relationship with the company, constitute taxable services. CBIC Circular No. 140/10/2020-GST clarifies that remuneration classified as salary and subjected to TDS under Section 192 is outside GST, while separately classified professional remuneration subjected to TDS under Section 194J is taxable. Under Notification No. 13/2017-Central Tax (Rate), the recipient company must discharge GST on taxable director services through the Reverse Charge Mechanism (RCM). The generally applicable GST rate is 18%. Companies must also consider compulsory registration, self-invoicing for unregistered directors, payment vouchers and Input Tax Credit eligibility. The distinction between salary and professional compensation is therefore critical for determining the correct GST treatment and ensuring statutory compliance.

Introduction

The remuneration paid to company directors has historically been a subject of regulatory evaluation, particularly when distinguishing between salary and professional compensation. A key component of this compensation is sitting fees—payments made to directors for attending Board and Committee meetings.

Analyzing the GST implications on sitting fees requires evaluating the regulatory nexus between the Companies Act, 2013, the Income Tax Act, 1961, and the Goods and Services Tax (GST) Act, 2017, creates specific compliance obligations for companies.

Statutory Provisions Under the Companies Act, 2013

1) Section 197(5) – Payment of Sitting Fees

Section 197(5) of the Companies Act, 2013 explicitly empowers a company to pay sitting fees to its directors for attending meetings of the Board of Directors or committees thereof.

2) Cap on Sitting Fees

Under Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the sitting fees paid to a director cannot exceed ₹1,00,000 (Rupees One Lakh) per meeting of the Board or Committee.

3) Ceiling and Parity Principles for Independent and Women Directors

Read alongside Section 197(5), Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 dictates two core statutory parameters:

a) Monetary Ceiling: Sitting fees cannot exceed ₹1,00,000 (Rupees One Lakh) per meeting of the Board or Committee.

b) Proviso of Non-Discrimination: The sitting fees payable to Independent Directors and Women Directors must not be less than the sitting fees paid to other directors. This creates a statutory floor to ensure equal or favorable remuneration parity for non-executive oversight roles.

4) Exclusion from Overall Managerial Remuneration Limits

Unlike executive salaries or profit-linked commissions, sitting fees paid under Section 197(5) stand outside when calculating the overall maximum managerial remuneration limits (such as the 11% net profit threshold under Section 197(1)).

GST Implications under the CGST Act, 2017

1) Applicability of GST and Nature of Supply

Under Section 7(1)(a) of the CGST Act, 2017, “supply” includes all forms of supply of goods or services made for a consideration in the course or furtherance of business.

Sitting fees are paid in exchange for professional governance services provided by directors to the corporate entity, making it a taxable supply of service.

2) Non-Applicability of Schedule III (Employer-Employee Relationship)

Entry 1 of Schedule III to the CGST Act states that “Services by an employee to the employer in the course of or in relation to his employment” shall be treated neither as a supply of goods nor a supply of services. Therefore, it is explicitly excluded from the definition of supply.

a) Executive Directors (Managing/Whole-Time Directors): Sitting fees are generally not paid to Executive Directors who are on the regular payroll of the company as full-time employees.

b) Non-Executive & Independent Directors: These directors do not have an employment contract (contract of service) with the company. Instead, they provide governance services under a contract for service. Consequently, sitting fees paid to them fall outside Schedule III and are fully liable to GST.

3) Administrative Clarification: CBIC Circular No. 140/10/2020-GST

To resolve ongoing litigation regarding director remuneration & audit disputes, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 140/10/2020-GST. The circular established a clear distinction based on income tax treatment:

a) Taxed under Section 192 (Salaries): If remuneration is paid to a director as an employee and subjected to TDS under Section 192 of the Income Tax Act, it falls under Schedule III and is outside the scope of GST.

b) Taxed under Section 194J (Fees for Professional/Technical Services): Sitting fees are generally subjected to TDS under Section 194J(1)(ba) of the Income Tax Act. This classification treats the fee as professional remuneration rather than salary and indicates that sitting fees are paid under a contract for service, making them fully liable to GST where the services are rendered outside the employment relationship.

4) Mechanism of Tax Payment: Reverse Charge Mechanism (RCM)

According to Notification No. 13/2017-Central Tax (Rate) (Entry No. 6), services supplied by a director of a company or a body corporate to the said company or body corporate are covered under the Reverse Charge Mechanism (RCM).

Key RCM Compliance Requirements

• Taxpayer Liability: The obligation to pay GST rests on the company receiving the service, not on the individual director.
• Applicable Rate: 18% (CGST 9% + SGST 9%, or IGST 18% depending on the applicable place-of-supply and location provisions).
• Mandatory Registration: Under Section 24(iii) of the CGST Act, 2017, a company receiving services subject to RCM must obtain GST registration, irrespective of its annual aggregate turnover, subject to applicable statutory exceptions.
• Self-Invoicing & Payment Vouchers: Under Section 31(3)(f) of the CGST Act, the recipient company must generate a self-invoice for sitting fees paid to unregistered directors within the prescribed period and issue a payment voucher under Section 31(3)(g) at the time of payment.
• Input Tax Credit (ITC): The company can claim Input Tax Credit on the GST paid under RCM on sitting fees, provided the service is used in the course or furtherance of its business (and not restricted under Section 17(5)).

Summary Comparison Matrix

Conclusion

The legal framework governing director sitting fees balances corporate compliance under the Companies Act, 2013 with indirect tax mandates under the CGST Act, 2017. Because sitting fees paid under Section 197(5) generally represent professional compensation rather than an employer-employee wage structure, they fall outside Schedule III when paid for services rendered independently of employment. As a result, companies must discharge 18% GST under RCM on taxable sitting fees paid to non-executive and independent directors, ensuring compliance through applicable self-invoicing requirements and timely tax payment.