Applicability of GST on Directors Remuneration – a critical analysis

1. Recent Advance Ruling Orders on whether GST is payable (under Reverse Charge) on remuneration payable to Directors?

Recently Rajasthan Authority for Advance Ruling in the case of M/s Clay Craft India Pvt Ltd (Jaipur) (Order No RAJ/AAR/2019-20/33 dated 20^th February, 2020) held that remuneration payable to Directors is taxable and liable to GST under reverse charge.

Earlier, in a similar matter of M/s Alcon Consulting Engineers (India) Pvt. Ltd (Karnataka), Order No KAR ADRG 83/2019 dated 25^th September, 2019, Karnataka Authority for Advance Ruling held that remuneration paid to directors is liable to GST under Reverse Charge Mechanism.

2. Position under GST Law on taxability of services provided by Director –

Section 9(3) and Section 9(4) of the CGST Act, 2017 contains the provisions with respect to Reverse Charge Mechanism in respect of certain services which are notified from time to time.

Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017 provides for GST to be paid on reverse charge basis by the recipient of the such services. The notification is issued under Section 9(3) of the COST Act, 2017. Entry 6 of the said Notification reads as under –

S. No	Category of Supply of Services	Supplier of Service	Recipient of Service
6	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	The company or a body corporate located in the taxable territory

Schedule III of CGST Act, 2017 provides for certain transactions which are neither considered as supply of goods or supply of service – One entry being, Services by an employee to the employer in the course of or in relation to his employment are NOT to be considered as a supply.

3. Positions under Service Tax Regime on services provided by Director –

Services of Director of a ‘Body Corporate’ has been included in the purview of Director Services, w.e.f 11^th July, 2014. Service provided by a director incapacity of an employee of the Company or Body Corporate shall not be chargeable to service tax. Deduction of TDS under salary head can establish the same.

Service Tax was payable under Reverse Charge on Sitting fees payable to Directors for attending Board or Committee meetings.

Reference Case Laws under Service Tax Regime –

1. ALLIED BLENDERS AND DISTILLERS PVT. LTD. Vs. C.C.E. & S.T., AURANGABAD 2019 (24) G.S.T.L. 207 (Tri. – Mumbai)

2. BRAHM ALLOY LIMITED Vs. COMMISSIONER OF CGST & C. EX., DURGAPUR 2019 (24) G.S.T.L. 616 (Tri. – Kolkata)

4. Important Points before concluding payment of GST on Directors’ Remuneration –

Though the pronouncements may have a guiding factor to decide if GST is payable under Reverse Charge on remuneration paid to Directors’, we need to look into various aspects of the Advance Ruling as whole as well as with particular reference to the aforesaid two judgements.

5. Questions to Ponder on applicability of GST on Directors Remuneration –

S. No	Questions to Ponder	Evidence may be gathered from-
I	Whether any agreement or contract is made with the director?	Verify the Contract/ agreement entered with Directors and check the terms and conditions
II	Whether directors is a full time or whole time director?	Verify the Contract/ agreement entered with Directors and e-form filed with MCA (Form 32/ DIR 12) to check designation of the Director
III	Whether director participates in the day to day activities or affairs of the Company?	Check with the Company officials and terms of reference of the Appointment letter or contract with the director
IV	Whether the director receives salary as a remuneration and periodicity of such payment?	Check Salary register or payment of remuneration to Director. Periodicity may not be material (Monthly or quarterly) but nature of payment is material.
V	Whether the company deducts the TDS u/s 192 of the Income Tax Act, 1961?	Obtain copy of TDS Certificate or form 26AS from the Director to check the nature of deduction.
VI	If the remuneration is declared under the head Salary in the Income Tax Returns filed by the director?	Check the Income Tax Return filed with Income Tax Department and head of Income such remuneration is reported by the Director

 6. To Whom an order of Advance Ruling is Applicable –

An advance ruling pronounced by AAR or AAAR shall be binding only on the applicant and on the concerned officer or the jurisdictional officer in respect of the applicant.

This clearly means that an advance ruling is not applicable to similarly placed other taxable persons in the State. It is only limited to the person who has applied for an advance ruling.

Hence, there is no need to draw any conclusion based on the aforesaid rulings and applicability of said rulings on all other taxpayers.

7. Some Instances Where GST is payable for Payment made Directors –

1. Sitting fees paid to Directors for attending meetings

2. Payment made to director for professional or technical services provided to the company (TDS not deducted under Head Salary)

3. Payments made to directors other than in whole-time employment of the Company. (Payments made to independent directors)

8. Whether entities begin payment of GST on Directors Remuneration/salary (Full time directors) –

Based on the aforesaid discussion we may conclude that there is no need to pay GST on salary paid to directors. If the director and the Company has entered into an agreement/Contract and the director is engaged in full time employment of the Company, in our view GST may not be applicable.

Further,  Schedule III of CGST Act, 2017 provides  for Services by an employee to the employer in the course of or in relation to his employment are NOT to be considered as a supply and hence GST May not be applicable.

Additionally, an advance ruling is not applicable to similarly placed other taxable persons in the State. It is only limited to the person who has applied for an advance ruling.

However, the nature of each transaction and payment is to be ascertained before taking the final call on payment of GST. GST is to be paid under Reverse Charge Mechanism for payments made to directors on sitting fees, or payments made to independent directors or payments made for services rendered for professional or technical nature.

6. Conclusion –

It will be interesting to observe the stand of the Appellate Authority (if the Order is appealed against) or Government/CBIC (suo moto clarification may be expected).

Similar Ruling was made by Karnataka Authority for Advance Ruling and this is second such judgement. Though Department authorities have not taken any action for recovery of GST on payments made to Directors basis the aforesaid judgement.

Seeing a similar order in the matter, Authorities may start issuing notices for recovery of GST on payment of remuneration to the directors.

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