The Background on which the whole discussion of RCM Liability on Directors Remuneration is connected with the Notification 13/2017 CTR dated 28.06.2017 called as the RCM notified services list. In this list as per the entry number 6 of this notification services supplied by a Director of a company or a body corporate to the said company or the body corporate is liable to tax under reverse charge. Thus, the company or a body corporate located in the taxable territory, being the recipient of service is liable to pay tax under reverse charge.
In this one should also note that the entry has contained the word Director which has a broad meaning and has extended its arm on all type of Directors as per the Companies Act includes: –
- Executive director
- Non-Executive Directors
- Managing directors
- Independent directors
- Residential director
- Small Shareholder Directors
- Women directors
- Additional Directors
- Alternate director
- Nominee Director
In the above background, it pertinent to note that there can be various
services which can be provided by the Director to the company and for which the payment is made by the company. Like: –
- Services as a director/employee for which director remuneration is paid
- Renting of immovable property
- Commission on certain transaction
- Sitting fee
- Independent Professional/advisory fee
Now, the question arises whether the above services provided by the director would be treated as supply and consequently the payment made by the company would be liable to tax under reverse charge?
Before we proceed further Let’s refer the History of the Judicial Precedence of this: –
ERSTWHILE IN SERVICE TAX REGIME:
A similar entry was also covered under reverse charge under the service tax regime. The CBIC (CBEC) via Draft Circular vide Letter No. F. No 354/127/2012-TRU dated 27-07-2012 in para 7 clarified as follows in this regard: –
Services of a director on the board of a company have now become taxable. A director may be appointed either in an individual capacity or to represent an entity (including government) who has either invested in the company or is otherwise authorized to nominate a director. When a director receives payment in his capacity, the same is liable to be taxed in the hands of the director. However, where the fee is charged by the entity appointing the director and is paid to such entity, the services shall be deemed to be supplied by such an entity and not by the individual director.
Thus, in the case of Govt. nominees, the services shall be deemed to be provided by the Govt. and liable to be taxed under the exclusion sub- (iv) of clause (a) of section 66D of the Finance Act, 1994 i.e. support services by Government to business. Such services are liable to be taxed on a reverse charge basis.
Thus, the basis above, since the service provided by the director in his personal capacity, the director remuneration paid by the company should not be liable to tax under reverse charge. It would be treated as part of the employment contract.
No company under service tax regime paid tax under reverse charge on director remuneration while similar entry was there in erstwhile regime also.
Further, CBIC (then CBEC) issued Circular No. 115/09/2009 – ST dated 31-07-2009, whereby it was clarified in para 3 that remunerations paid to Managing Director / Directors of companies whether whole-time or independent when being compensated for their performance as Managing Director/Directors would not be liable to service tax.
Under GST Regime: –
In 2019 AAR: – Karnataka Observations
M/s. Alcon Consulting Engineers (India) Pvt. Ltd. AAR, Karnataka observed and held that the remuneration to the Directors paid by the applicant is not covered under clause (1) of the Schedule III to the CGST Act, 2017, as the Director is not the employee of the Company. The consideration paid to the Director is in relation to the services provided by the Director to the Company and the recipient of such service is the Company as per clause (93) of section 2 of the CGST Act and the supplier of such service is the Director. Since the applicant is the company and is located in the taxable territory and the Directors’ remuneration is paid for the services supplied by the Director to the applicant company and hence the same is liable to tax under reverse charge basis under section 9(3) of the CGST Act, 2017.
In 2020 AAR: – Rajasthan Observations
M/s Clay Craft India Private Limited the advance ruling authority for Rajasthan upholds the above view. M/s Clay Craft India Private Limited the advance ruling authority for Rajasthan upholds the above view.
However, in both these advance rulings, a very important question that has not been considered and deliberated by Authority is ‘whether the director of a company is an employee or not the AAR simply states that since the services are provided by the director to the company, these shall be covered under section 9(3) [RCM] and the company is liable to pay tax on the same.
Reference to Schedule III of CGST Act: –
As the services provided by an employee to the employer in the course of or in relation to his employment are not treated as ‘supply’ as per Schedule III to CGST Act, 2017. It is important to understand the term ‘employee’.
The term ‘employee; has not been defined under the GST Law. However, there are various labour law legislation which defines the term ‘employee’ like the Factory Act, Employee Provident Fund Act, Employees Estate Insurance Act, etc. The definition of employee as provided in these Acts may not be applicable in the GST Law as given concerning the particular Act. Generally, in order to have an employer and employee relationship, the employer shall exercise absolute and effective control over the employee, not only sufficient control. The several factors which may be considered for determining the relationship of employer and employee can be:
- who is the appointing authority;
- who is the paymaster;
- who can dismiss;
- how long alternative service lasts;
- the extent of control and supervision;
- the nature of the job e.g. whether it is professional or skilled work;
- nature of establishment;
- the right to reject.
Many of these factors shall be applied together to determine employer and employee relationship. The employer and employee relationships have been analyzed by the courts on various occasions.
IMPLICATIONS: – If RCM Applicable
For the sake of simplicity, if we assume that all the services provided by directors to the company are covered under GST and liable to tax under reverse the charge then the following consequences would be as follows:
♦ Director remuneration paid to directors shall be liable to tax @ 18% under reverse charge u/s 9(3). Thus, All the companies, irrespective of the level of activity or the aggregate turnover, shall have to take registration compulsory u/s 24(iii).
♦ The other payments made to directors like rent, sitting fee, professional fee, etc. would be taxed under reverse charge. Further, there is no doubt about the taxability of these payments under reverse charge.
Conclusion: –
| Directors Work under the capacity of Employees | Covered under Schedule III to section 7 of the CGST Act |
| Directors Provide service in a capacity other than Employees | GST Applicable under RCM under 9(3) |
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