A brief idea about the present practice in Industry:

Normally the company pays remuneration to its director for managing day to day affairs of the company and treat the directors as employees for all statutory and legal purposes. The Schedule III Clause (1) of CGST ACT, 2017 treats supply of service in relation to the employer-employee relationship as a non-taxable supply. Hence the companies treat such remuneration as a non-taxable.

In some cases, directors are paid remuneration in the form of commission/sitting fees/fees under professional relationship as a part of an independent contract. A company usually treats these services are taxable under GST as they are beyond the services in relation to the employer-employee relationship and pay GST on RCM basis as per Central Tax (Rate) notification.

Interpretation by various Authority of Advance Ruling (AAR) under the GST Act

Recently an application was made to Rajasthan AAR seeking clarification on whether salaries paid to directors would attract GST. The applicant company was paying its director remuneration in the same way as per the present practice in the industry. In the application, the applicant company gave references of the Income-tax Act, Companies Act, EPF and Misc Provision Act and certain other references and interpretations available under GST Law to justify the remuneration paid to directors for managing day-to-day affairs of the company is towards supply in relation to employer and employee relationship between Company and directors. While analyzing the case AAR made findings that the Central Tax (Rate) notification clearly states that services supplied by a Director of a company will be considered as supply and hence directors cannot be called an employee. Thus AAR held that all services rendered by Directors to the company for which consideration is to be paid are liable to pay GST under RCM. A similar decision was given earlier by Karnataka AAR.

Clay Crafts India Pvt. Ltd. (GST AAR Rajasthan)- Remuneration to director attracts GST under RCM

In re M/s Alcon Consulting Engineers (India) Pvt. Ltd. (GST AAR Karnataka)

Points to Consider in respect of above decisions:

1. Even after giving a detailed explanation to justify the employer-employee relationship between company and directors, the AAR has given a safe judgment going by the actual words of the notification. The decisions of AAR even did not precisely explain why the directors cannot be an employee.

2. An advance ruling pronounced by AAR shall be binding only on the applicant and on the concerned officer or the jurisdictional officer in respect of the applicant. This 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. However, GST tax officers and GST Auditors may use these AAR decisions as guidance for deriving their judgments while assessing or auditing the case thereby increasing the litigations.

3. Related Matters under Service Tax regime

a. A similar provision of RCM with regards to services provided by a director to the company existed under Service Tax Law. However, before the introduction of this provision, CBEC had much before issued a clarification stating that remunerations paid to directors when being compensated for their performance as Directors would not be liable to service tax.

b. In a case of similar facts as in AAR mentioned above, CESTAT Mumbai Bench stated that directors, who are concerned with the management of the company, were declared to all statutory authorities as employees of the company and complied with the provisions of the respective Acts, Rules and Regulations indicating the Director as an employee of the company and held that no service tax on remuneration paid to directors if they were employees of the company.

c. MCA had issued a circular clarifying the issue relating to limits of remuneration of directors due to Service Tax on RCM basis on Commission/Sitting fees payable to Non-Whole time director. The exclusion of Whole-time Directors and Managing Directors in this MCA circular clarified the intention of the legislature that the said directors are employees of the company and activities carried out by them cannot be termed as service and made liable to service tax.

Conclusion:

  • In case of remuneration paid to Directors other than commission/sitting fees/fees under professional relationship under service tax regime, there were certain provisions/circulars/case laws which were in favour of treating this service as non-taxable.
  • Presently under the GST regime as well the industry has majorly treated these remunerations as non-taxable. With coming up of such AAR contrary to this view and if the similar view is followed by GST officers and GST Auditors will heavily penalize the industry at a large with interest, non-availability of ITC and huge cash flow impact due to payment of GST on these directors remuneration in case of earlier year GST Assessment and GST Audit.
  • Thus every company needs to carefully consider the facts of each case to determine whether GST is payable or not in respect of directors remuneration and the GST Council must come up detailed clarification in this matter.

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