Clarification by CBIC in respect of levy of GST on remuneration payable to Directors –
Much confusion was created by recent Advance Ruling passed by 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 20th February, 2020) which 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 25th September, 2019, Karnataka Authority for Advance Ruling held that remuneration paid to directors is liable to GST under Reverse Charge Mechanism.
Department had started issuing notices to the entities for levying GST on remuneration payable to directors.
Considering the difficulty faced by divergent decisions and recent notices, CBIC has issued clarification vide Circular No 140/10/2020-GST dated 10th June, 2020, the summary of which is reproduced below –
| S. No | Director Category | Nature of Payment | Treatment |
| 1 | Independent Director or Non- Employee Director | Any Payment | GST Payable under Reverse Charge Mechanism |
| 2 | Whole Time Director including Managing Director | Remuneration or Salary – TDS Deducted u/s 192 of IT Act, 1962 under “Salaries” | GST is not payable (Employer-employee relationship). Exempted under Schedule III of CGST Act, 2017 |
| 3 | Whole Time Director including Managing Director | Any payment made – TDS Deducted u/s 194J of IT Act, 1962 under “fees for professional or technical services” | GST is payable under Reverse Charge Mechanism |
| 4 | Any Director | Sitting Fees | GST is payable under Reverse Charge Mechanism |
Detailed Discussion:
1. The Circular examines levy of GST on directors remuneration under 2 categories –
2. Remuneration paid to the 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
3. Remuneration paid by companies to the whole-time directors including managing director who are employees of the said company
Same is discussed in below –
1. Remuneration Payable to 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
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. In terms of entry at Sl. No. 6 of the Table annexed to notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.
Clarification – The remuneration paid to such independent directors, or those directors, by whatever name called, who are not employees of the said company, is taxable in hands of the company, on reverse charge basis.
2. Remuneration paid by companies to the whole-time directors including managing director who are employees of the said company
Whether a director, irrespective of name and designation, is an employee, and all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service”) or is there any element of “contract for service”. On the basis of the contractual relationship of master and servant with the company, i.e. under a contract of service (employment) entered into with the company.
1. 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
2. The part of employee Director’s remuneration which is declared separately other than “salaries” in the Company’s accounts 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 which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable and GST is liable to be paid.
3. Further, in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.
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