Analysis of GST applicability on Directors Remuneration – Part II (Circular NO 140/10/2020- GST dated 10-06-2020)

Further to my article on GST Applicability on Directors Remuneration – Part I, I have mentioned my views on the said subject. In my earlier article I had also analyzed 3 (Three) Authority of Advance Rulings on the said subject.

Now department has issued circular on the said subject Circular NO 140/10/2020- GST dated 10/06/2020.

Doubts have been raised as to whether the remuneration paid by the companies to their directors falls under the ambit of entry in Schedule III, clause no 1 of Central Goods and Service Tax Act , 2017  (hereinafter referred to as the CGST Act) i.e. “ Services by an employee to the employer in the course of or in relation to his employment” (Schedule III deals with activities or transactions which shall be treated neither as a supply of Goods nor a supply of services) so outside the ambit of GST or whether the same are liable to be taxed in terms of notification No. 13/2017- Central Tax (Rate) dated 28-06-2017 (SI. No. 6 of the Table annexed to the said notification) on reverse charge basis.

The issue of remuneration to directors has been examined under the following two different categories:

(i) 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

(ii) Leviability of GST on remuneration paid by companies to the whole-time directors including managing director who are employees of the said company.

Section 149 (6) of the Companies Act 2013

An independent director in relation to a company means a director other than a managing director or a whole-time director or a nominee director,

Powers to issue instructions or directions to the Board is mentioned in Section 168 (1) of the CGST Act which is reproduced below

Section 168 (1) of CGST Act

The Board may, if it considers it necessary or expedient so to do for the purpose of uniformity in the implementation of this Act, issue such orders, instructions or directions to the central tax officers as it may deem fit, and thereupon all such officers and all other persons employed in the implementation of this Act shall observe and follow such orders, instructions or directions.

In order to ensure uniformity in the implementation of the provisions of the law across the field formations, the Board, in exercise of its powers conferred under section 168 (1) of the CGST Act hereby clarifies the issue as below:

Leviability of GST on remuneration paid by the companies to the independent directors or those directors who are not the employees of the said company

The primary issue to be decided whether or not a Director is an employee of the company. In this regard, from the perusal of the relevant provisions of the Companies Act, 2013, it can be inferred that:

a. 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.

My Comments on above  

Section 2 (94) of the Companies Act 1956 deals with

“whole-time director” includes a director in the whole-time employment of the company. As the definition is inclusive so Board is telling that whole-time director can be a person who is not in whole-time employment of the company i.e. employment contract is not signed but professional service contract may be signed.  So employer and employee relationship is not existing. And instead of paying salary to such whole-time director who is not in the whole-time employment of the company, professional fees is paid and Income Tax TDS is deducted under section 194 J of the IT Act.

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 amply clear that such 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 in the said company.

Therefore, in respect of such directors who are not the employee 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 SI 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.

Leaviability of GST on remuneration paid by companies to the director, who are also an employee of the said company.

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. 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. a contract of service/employment entered into with the company.

It is also pertinent to note that similar identification as mentioned above and treatment of Directors remuneration is also present in the Income Tax Act 1961 wherein the salaries paid to directors are subject to Tax Deducted at source (TDS) under section 192 (TDS on salary) of the Income Tax Act 1961 (IT ACT). However, in cases where the remuneration is in the nature of Professional Fees and not salary, the same is liable for deduction under section 194 J of the IT Act as Fees for Professional or Technical Services.

Accordingly, it is clarified that part of Director’s remuneration which are declared as salaries in the books of 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 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 account and subjected to TDS under section 194 J 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 entry at SI 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.

My Comments

In my earlier article I had mentioned that Government should integrate various laws for proper implementation.  It is rightly mentioned in the said circular that Directors who are employees of the company & Directors remuneration declared in the books as salary and on which Income Tax TDS is deducted under section 192 TDS on salary, are not taxable under GST being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of entry no. 1 of Schedule III of CGST Act 2017. But if employee Directors Remuneration which is declared separately then salaries in companies accounts and subject to TDS under section 194 J of 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 in terms of entry at SI No. 6 of the Table annexed to notification no 13/2017- Central Tax (Rate) dated 28-06-2017 to the company on reverse charge basis.

In the above circular commission/brokerage paid to Director is not covered. But based on above circular one can conclude that if Commission/Brokerage is paid to employee Director and shown in the company’s book as salaries and on which TDS under section 192 of the IT Act is deducted then the same will be also outside the ambit of GST in terms of entry no. 1 of Schedule III of CGST Act 2017.  However, if commission/brokerage paid to employee director or director who is not an employee if shown in company’s books as commission/brokerage and on which Income Tax TDS is deducted under section 194 H of the IT Act then the same will be outside the scope of Schedule III of the CGST Act and is therefore taxable in terms of entry at SI No. 6 of the Table annexed of notification No. 13/2017- Central Tax (Rate) dated 28-06-2017 and the company is liable to discharge the applicable GST on it  on reverse charge basis.

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