Advance Ruling of Rajasthan Authority in case of Clay Crafts India Pvt Ltd dated (20-02-2020):
As per the given ruling, GST is payable under RCM by the recipient of services, on Salary paid to director.
This Ruling is given on the basis of ENTRY No 6 of Notification no 13/2017 dated 28.06.2017 and as per entry no 6:
Category of Supply of Service:
Services supplied by a director of a company or a body corporate to the said company or the body corporate.
Supplier of Service:
A director of a company or a body corporate.
Recipient of service:
A company or a body corporate located in the taxable territory
And recipient of services will pay tax under RCM
NOTE: This Ruling has created confusion in the minds of all companies, directors and management of companies.
Reason for Confusion:
Schedule III Activities:
Activities or the transactions which are neither treated as supply of goods nor supply of services as per Sec.7 (2) of the CGST ACT 2017 which are as follows:
1. Services By employee to Employer in the course /relation to employment
2. Services of Funeral , Burial , Crematorium or mortuary,
3. Sale of land , and completed buildings ,
4. Actionable claims (other than lottery , betting and gambling)
5. Services by any court or Tribunal
6. The Functions performed by the members of parliament Etc.
Note: Services by the employee to employer in the course/relation to employment are covered under schedule III So, It should not be taxable as it is not supply as per Sec.7 (2) Of CGST Act 2017.
Any Activity or transaction will be taxable or non taxable only when it will be supply as per Sec 7 of CGST Act 2017.
Now the Question is whether a director is an employee Of Company?
As per Circular No 140/10/2020-GST
Clarification in relation to Leviability of GST on remuneration / Any consideration paid by companies to the independent directors or those directors who are not the employee of the said company:
1. The definition of a whole time-director under section 2(94) of the Companies Act, 2013 is an inclusive definition, and thus he may be a person who is not an employee of the company. (Means It is not necessary that WTD should be an employee of the company)
2. The definition of Independent directors under section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it clear that such director ( Independent Director ) :
Should not have been an employee or proprietor or a partner of the said company, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed as Independent director in the said company.
3. Therefore, 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.
4. Accordingly, it is hereby clarified that 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.
5. It is further clarified that 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.
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.
Leviability of GST on remuneration paid by companies to the directors, who are also an employee of the said company:
1. Once, it has been ascertained whether a director, irrespective of name and designation, is an employee, it would be pertinent to examine whether 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”.
2. The issue has been deliberated by various courts and it has been held that a director who has also taken an employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other 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.
Note: There should be contract Of Services Not Contract for Services.
3. Accordingly, it is clarified that 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.
Conclusion:
If TDS is deducted U/S 192 of the IT Act in that case It will be covered under Schedule III of the CGST Act 2017 , and will not be liable to GST .
If TDS is deducted U/S 194 J of the IT Act in that case it will be covered under Entry No 6 of the Notification No 13/2017 dated 28-06-2017 and Tax is to be paid by the Recipient of Services under RCM.
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