Analysis of the Circular dated 10th June,2020 issued by CBIC on Directors’ Remuneration

Background

Payment of GST under Reverse Charge Mechanism in respect of Directors’ Remuneration has created confusion amongst the taxpayers due to two recent judgements given by Advance Ruling Authorities which gone against the Applicants. Recently the Advance Ruling Authority of Jaipur, Rajasthan has issued an Advance Ruling wherein the AAR has given the verdict that GST is applicable on Director’s Remuneration under Reverse Charge Mechanism and therefore, the Company which is paying the same, shall deposit the same to the exchequer. [ Ref AAR No. RAJ/AAR/2019-20/33 dated 20.02.2020, Applicant: M/s Clay Craft India Pvt Ltd.]. Similar ruling was also given by Advance Ruling Authority of Karnataka in the case of M/s Alcon Consulting Engineers (India) Pvt Ltd[ AR No. KAR ADRG 83/2019 dated 25.09.2019]. These two cases have raised the question amongst most of the business houses whether GST is payable on Remuneration paid to directors under Reverse Charge Mechanism.

The Circular No. 140/10/2020 – GST dated 10th June, 2020 was issued by the CBIC to clarify the position of law.

Provisions in GST Law

Section 9(3) of the CGST Act, 2017 empowers the Central Government to notify certain goods and services on which GST shall be paid by the Receiver of Goods and/or Services under Reverse Charge Basis. Similar provision is also there in IGST Act, 2017 and respective State GST And UTGST Acts. Based upon the same Notification No. 13/2017-Central Tax(Rate) dated 28.06.2017 has been notified. In Sl.No. 6 of the said notification the following has been prescribed:

Sl. No. Category of Supply of Service Supplier of Service Recipient of Service
6. Services supplied by a director of a company or a body corporate to the said company or the body corporate. A director of a company or a body corporate. The company or a body corporate located in the taxable territory.

Therefore, as per the aforesaid Notification if any is Service Supplied by Director to the Company then the entire Tax liability is to be discharged by the Company.

However, Schedule III, clause I of the CGST Act, 2017 [ with corresponding provisions in other GST Laws], “Service by an employee to the employer in the course of or in relation to his employment” is neither Supply of Goods nor Supply of Services and so, GST shall not be levied in respect of such transaction.

Therefore, conjoint reading of Schedule III and clause 6 of the Notification No. 13/2017 Central Tax(Rate) dated 28.06.2017 may generate the following doubts in the mind of taxpayers:

  • Whether a director of a company shall be treated as employee of the company.
  • Whether all directors are employee of the company or only some of the directors are employee.
  • When to treat a director as employee of the company.
  • Whether GST Reverse charge liability needs to be discharged in respect of remuneration paid to all directors.

Clarification provided in the Circular

Circular No. 140/10/2020 – GST dated 10th June, 2020 has been issued by the CBIC to clarify the aforesaid issues. The issue has been examined by the CBIC from two angles:

1. leviability of GST on remuneration paid by companies 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

2. leviability of GST on remuneration paid by companies to the whole-time directors including managing director who are employees of the said company.

The definition of Independent Director is provided in Section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 which makes it amply clear that Independent Director should not have been an employee of the company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed in the said company as Independent Director.

It has been clarified that 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.

In respect of Directors those who are employee of the company under a Contract of Service, it is pertinent to examine whether all the activities performed by them are in the course of his employment or not. 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.

The aforesaid circular has taken the reference from the Income Tax Act, 1961 and 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.
  • 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.

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