Imposition of GST on Directors: Another Instant of Transgression Through Notification of the Limits Provided by Parent Act
INTRODUCTION
Serial No. 6 of the Notification No. 13/2017- Central Tax (Rate), dated 28-06-2017 (Notification No. 13/2017) provides that the Services provided by Director to the body corporate would come under the ambit of Reverse Charge Mechanism. By the virtue of the said Notification, the services provided by the Director would be taxable. But the question arises that whether the said entry of the Notification is under the permissible limits as prescribed by the Parent Act i.e Central Goods Service Tax Act, 2017.
NOTIFICATION NO. 13/2017 UNDER THE AMBIT OF DELEGATED LEGISLATION
Article 265 of the Constitution provides that: “No tax shall be levied or collected except by authority of law.” Thus, both the levy and collection of tax shall be provided by a statute enacted by a competent legislature. A delegated legislation, i.e. a rule, regulation or notification, cannot provide for levy or collection of tax which is not authorized by the parent statute.
It is a settled principle of law that if a delegated legislation goes beyond the power conferred by the statute, such delegated legislation has to be declared ultra vires. The delegated legislation derives power from the parent statute and not without it. The delegated legislation is to supplant the statute and not to supplement it.Executive instructions can supplement a statute or cover areas to which the statute does not extend. But they cannot run contrary to statutory provisions or whittle down their effect.
In order for better understanding, the relevant provisions shall be discussed here. Section 7 of the CGST Act, 2017 states as under:
“7. Scope of supply.
(1)………………………………………………….
(2) Notwithstanding anything contained in sub-section (1),––
(a) activities or transactions specified in Schedule III; or
(b) ……………………………………………
shall be treated neither as a supply of goods nor a supply of services.
(3) ………………………………………………………….”
SCHEDULE III
[See Section 7]
“ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES
1. Services by an employee to the employer in the course of or in relation to his employment.
2. ………………………………
3. ………………………………
4. ……………………………….
5. ………………………………
6. ……………………………….
7. ………………………………..
8. ………………………………..”
On perusal of the above, it could be inferred that the services provided by an employee to the employer will not be termed as “Supply”. The term “Employee” has not been defined anywhere in the GST Laws, therefore it is apparent to take the reference of the recent Judgment of EMPLOYEES’ STATE INSURANCE CORPORATION V VENUS ALLOY PVT. LTD. CIVIL APPEAL NO. 1464 OF 2019, wherein the question before the Hon’ble Apex Court was that“whether the Directors of respondent-Company, who are receiving remuneration, come within the purview of employee under sub-section (9) of Section 2 of the Employees’ State Insurance Act, 1948 (‘the ESI Act’)”
The Hon’ble Supreme Court held as under:
“11. In the case of Apex Engineering (supra), the Board of Directors of respondent-Company resolved to elect one of its Directors as Managing Director of the Company and to grant him annual remuneration of Rs. 12,000/- for rendering services as Managing Director. The question was as to whether the said Managing Director was an “employee” within the meaning of Section 2(9) of the ESI Act? Though the High Court and the ESI Court had answered this question against the Corporation, but this Court allowed the appeal and, inter alia, held that the Managing Director, even when to be treated as principal employer, could also be an employee and could carry such dual capacity. This Court said,-
“8. But even assuming that the High Court was right that ShriDhanwate could be said to be principal employer there is nothing in the Act to indicate that a managing director being the principal employer cannot also be an employee. In other words he can have dual capacity….”
12. We are clearly of the view that what has been observed and held by this Court in Apex Engineering (supra), in relation to the Managing Director of a Company, applies with greater force in relation to a Director of the Company, if he is paid the remuneration for discharge of the duties entrusted to him.
On perusal of the above, the Director shall be treated as an Employee under the ambit of GST laws as well.
Now the Serial No. 6of the Notification No. 13/2017 in exercise of the powers conferred by sub-section (3) of section 9 of the Central Goods and Services Tax Act, 2017 notified the tax on the supply of services by the Director under the Reverse charge Mechanism.
Section 9(3) reads as under:
9. Levy and collection.
“(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”
On perusal of the above, and taking the definition of employee into consideration in the GST Act, theSerial No. 6 of the Notification is ultra vires the CGST Act as the Notification by virtue of Section 9(3) is imposing the tax on the employee which is subject to Section 7 of the CGST Act, 2017 and violating both Section 7 and Schedule III of the CGST Act as director comes under the ambit of the definition of “employee”. Hence the Serial No. 6 of the Notification No. 13/2017 is ultra vires the GST Act.
It is relevant to mention herein that theHon’ble Supreme Court in the case of GOVIND SARAN GANGA SARAN V. CST, AIR 1985 SC 1041, held that :‘6… The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity’.
In the present issue, the first component i.e. imposition of tax is not fulfilled as it is hit by Section 7 read with Schedule III and the Ruling of Employees’ State Insurance Corporation v Venus Alloy Pvt. Ltd. (supra).
The delegated authority must act strictly within the parameters of the authority delegated to it under the Act and it will not be proper to bring the theory of implied intent or the concept of incidental and ancillary power in the matter of exercise of fiscal power.
RECENT JUDGMENTS WHEREIN THE NOTIFICATIONS WERE HELD TO BE ULTRA VIRES THE PARENT ACT
In the Judgment of MOHIT MINERALS PVT LTD V.UNION OF INDIA,R/SPECIAL CIVIL APPLICATION NO. 726 of 2018, wherein the facts were that
the Central Government has introduced the Notification No.8 of 2017 – Integrated Tax (Rate) dated 28th June 2017,wherein vide Entry No.9, the Central Government has notified that the IGST at the rate of 5% would be leviable on the service of transport of goods in a vessel including the services provided or agreed to be provided by a person located in a non-taxable territory to a person located in a non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the customs stations of clearance in India.
The issue was that when the statutory provision empowers collection of tax from the recipient of goods or services, then whether the delegated legislation by way of notification can stipulate imposition of tax on a person who is neither the supplier nor the recipient of service.
It was observed by the Hon’ble Gujarat High Court as under:
“238. Under the IGST Act, the integrated tax is leviable only on inter-state supplies made or agreed to be made. As stated above,the supply of services provided by a person in a non-taxable territory to a person in a non-taxable territory by way of transportation of goods in a vessel from a place outside India to the place of customs station of clearance in India is not an inter-state supply as per the provisions of Section 7 of the IGST Act.
239. Further, as per Section 5(3) of the IGST Act, the Government is only authorized to specify the categories of supplyon which the tax is to paid by the recipient of the supply under the reverse charge basis. The Government cannot further specify the person liable to pay tax as other than the recipient of the supply.
240. There is no doubt that in the taxing legislation, the legislature deserves the greater latitude and the greater play in joints. This principle, however, cannot be extended so as to validate a levy by a subordinate legislation which has no sanction of law, however, laudable may have been the object to introduce it.
241. The legislature, while enacting the IGST Act, was aware of the wide provisions under the Finance Act, 1994, which provide the Government the power to collect tax under the reverse charge basis only from the recipient of the service but from any other person as may be prescribed. However, while enacting the IGST Act, the legislature consciously curtailed the power of the Government to collect tax under the reverse charge basis from any person and restricted it only to the recipient of the supply.”
On the basis of above observations, the writ was allowed and Notification No.8/2017 – Integrated Tax (Rate) dated 28th June 2017 and the Entry 10 of the Notification No. 10/2017 –Integrated Tax (Rate) dated 28th June 2017 was held to be declared as ultra vires the Integrated Goods and Services Tax Act, 2017, as they lack legislative competency.
Then, in the case of SHABNAM PETROFILS PVT.LTD.V. UNION OF INDIA,R/SPECIAL CIVIL APPLICATION NO. 16213 of 2018, the issue according to the petitioners therein was that the Notification No.20/2018 dated 26.07.2018 issued extends the restriction on the utilization of unutilized input tax credit for and up to the month of July, 2018 and further states that on the inward supplies received upto 31.7.2018 shall lapse and further states that inward supplies received upto 31st day of July, 2018, shall lapse.
It was contended by the Petitioners that there is no statutory provision under the CGST Act empowering the respondents to issue notifications providing for lapsing of input tax credit. It was contended that rule can be made or notification can be issued under the guise of section 164 for lapsing input tax credit. It was also contended that power under section 54(3)(ii) of the CGST Act is limited to notify the supplies not entitled to refund of input tax credit accumulated on account of the inverted rate structure. It was contended that the impugned notifications have exceeded powers delegated under section 54(3)(ii) of the CGST Act.
The Hon’ble Gujarat High Court observed that it is a well settled principle that the delegated legislation has to be in conformity with the provisions of the parent statute. By prescribing for lapsing of ITC, the Notification No.05/2017-C.T. (Rate) dated 28.06.2017, as amended by Notification No.20/2018-C.T. (Rate) dated 26.07.2018, has exceeded the power delegated under Section 54(3)(ii) of the CGST Act and subsequently held that proviso (ii) of the opening paragraph of the Notification No.05/2017-C.T. (Rate) dated 28.06.2017, inserted vide Notification No.20/2018- C.T. (Rate) dated 26.07.2018, as invalid.
CURRENT SCENARIO
The recent Authority of Advance Ruling, Rajasthan in case of CLAY CRAFT INDIA PVT. LTD.dated 20.02.2020 have triggered a question that whether the GST shall be chargeable on the remuneration paid or payable to the directors. The Authority in the said case has taken only referennce Notification No. 13/2017 into consideration, and have not considered directors as employees of the company.
Now the question arises, that how this Ruling is going to impact other Assessee. So the answer is that the Advance Ruling is only applicable on the Applicant and concerned officer by the virtue of Section 103 of the CGST Act, 2017. Therefore, this particular Ruling cannot be a precedent for other Assessees, but this Ruling have given a signal that in future Department could dispute on the said issue as Notification No. 13/2017 is still in force.
CONCLUSION
The assessees should draft their Contracts very carefully while making appointment of any kind of director and should ensure that all the attributes of an employee is present in the said Contract.
To finish the impact of Serial No. 6 of the Notification No. 13/2017, a representation should be moved to the GST Council wherein all the landmarks Judgments pertaining to the permissible ambit of delegation legislation should be stated.
The second option could be to file Writ petition under Article 226 of the Constitution of India for declaring Serial No. 6 is ultra vires to the CGST Act, 2017.
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