Intention of the Government is not to charge GST on services rendered by employees to employer. On the same lines as per Schedule III, clause no 1, of Central Goods and Service tax Act, 2017 Services by an employee to the employer in the course of or in relation to his employment is covered in activities or transactions which shall be treated neither as a supply of Goods nor a supply of services.
So any services provided by an employee to the employer in the course of or in relation to his employment are outside the ambit of GST Act.
Also Read- Analysis of GST applicability on Directors Remuneration – Part II
In the press release dated 10-07-2017 position of taxation of perquisites is also clarified. It is mentioned in the said press release that services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods nor supply of services). It follows therefrom that supply by the employer to the employee in the terms of contractual agreement entered into between the employer and the employee, will not be subject to GST. Further, the input tax credit (ITC) scheme under GST does not allow ITC of membership of a club, health and fitness center (section 17(5) (b) (ii)). It follows, therefore, that if such services are provided free of charge to all the employees by the employer than the same will not be subject to GST, provided applicable GST was paid when procured by the employer. The same would hold true for the rent free housing facility given to the employees when in terms of the contract between the employer and employee and is part and parcel of the cost-to-company (CTC).
Therefore it is utmost importance that employment contracts with employees should be drafted carefully to avoid litigations later i.e. scope of services should be defined properly and break up of cost-to-company (CTC) should also be given.
Now we will examine whether Director is considered as employee of the company or not. To find out the answer we will have to refer Companies Act 2013. Broadly speaking there are two types of Director in the Companies Act 2013 namely
1) Executive Director and
2) Non – Executive Director
1. Executive Director
As per Rule 2 (1) (k) of the Companies (Specification of definitions details) Rules 2014
“Executive Director” means a whole time director as defined in clause (94) of section 2 of the Companies Act 2013.
As per Section 2(94) of the Companies Act 2013
“whole-time director” includes a director in the→ whole-time employment of the company.
Director → Whole-time employment of the company → whole-time Director→ Executive Director
Therefore, from the above mentioned provision a person can conclude that “whole-time Directors” shall be considered as “Executive Directors”.
Non- executive Director is not defined in the Company’s Act 2013. Therefore a Director who is not full filling conditions mentioned in definition of Executive Director shall be considered as Non- Executive Director.
A non–executive director typically does not engage in the day-to-day management of the organization but is involved in policymaking and planning exercises.
As per Notification No. 13/2017- Central Tax (Rate) dated 28th June, 2017
In exercise of the powers conferred by sub-section (3) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government on the recommendations of the Council hereby notifies that on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4) of the said Table:-
| SI. NO. | Category of Supply of Services | Supplier of Service | Recipient of Service |
| (1) | (2) | (3) | (4) |
| 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. |
As per above notification services supplied by a director of a company is covered under reverse charge mechanism. But as discussed above as per Schedule III , clause no 1 , of Central Goods and Service tax Act, 2017 any services provided by an employee to the employer in the course of or in relation to his employment are outside the ambit of GST Act.
Therefore based on above discussion as per my view as per Schedule III, clause no 1, of Central Goods and Service tax Act, 2017 services supplied by an executive director who is in whole –time employment of the company and against the said service remuneration paid by the company in the course of or in relation to his employment as per the terms of contractual agreement entered into between the employer and the employee is outside the ambit of GST Act. The same is also because against such payment of Directors remuneration the company or the body corporate is also deducting TDS under section 192 under the head TDS on salary and also in the income tax return of Director the said remuneration received by the executive director is also shown under the head income from salary only.
GST will be payable by the company or by the body corporate on reverse charge basis against services received by the company or body corporate from non –executive director as they are not in whole –time employment of the company as per entry no 6 of Notification No. 13/2017- Central Tax (Rate) dated 28th June, 2017. The company or body corporates are paying directors sitting fees to non-executive directors who are independent director for attending board meeting or they pay against services rendered by non- executive director relating to policy making and planning exercises.
But my above view is though appears to be correct but will not be free from litigation because under GST Act or Rules or notifications or circulars are not talking about the said difference as I have made above. Employee Definition is also not given under GST Act. There are 2 advance authority ruling on the said director’s remuneration which we will discuss below who are also not making such difference so litigation will be bound to happen. However 3rd recent decision is in favor of the assessee and we will also discuss the same.
1) Karnataka Authority of Advance Ruling in the case of M/S Alcon Consulting Engineering (India) Pvt Ltd (KAR ADRG 83/2019 dated 25th Sept 2019)
Facts of the case
The applicant states that they are in the business of providing consultancy services like surface survey and map making, project management consultancy services for construction projects, engineering advisory services and technical testing analysis services to the General Public, State Government agencies and Central Government throughout the country.
Findings, Discussions and Ruling
Regarding the remuneration to the Directors paid by the applicant, the services provided by the Directors to the company are not covered under clause (1) of the Schedule III to the Central Goods and Service Tax Act 2017 as the Director is not the employee of the company. The considerations 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.
It is held that in the present case 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 that applicant company and hence the same is liable to tax under reverse charge basis under section 9 (3) of the Central Goods and Service tax Act 1957 as it is covered under entry no 6 of Notification No 13/2017 Central Tax (Rate) dated 28-06-2017.
One of the important remarks made by Advance Authority is mentioned below:
“The question before us is not whether this service is taxable or not but whether this supply of service is liable to tax under reverse charge mechanism.”
My Comments on above remark made by Advance Authority& on ruling
Above remark is very interesting i.e. if question before them was to tell whether this service is taxable or not in view of clause (1) of the Schedule III to the CGST Act 2017, then answer might have been different. Because in that eventmembers of the Advance Authority might have focused to find out whether Director who is in whole time employment is also called as employee or not and if considered as employee then whether remuneration paid to such Directors will be classified as activities or transactions which shall be treated neither as a supply of Goods nor a supply of services.
In the above judgment Advance Authority bench has simply said in plain vanilla language that Director is not the employee of the company. They have not analyzed provisions of Companies Act 2013 wherein it mentioned that executive director is one who is in whole time employment of the company so one can take the stand that they can be covered under category of employees. The same is because such distinction is not given under GST Act so when GST Act is silent it is advisable to refer relevant law which is companies act 2013 for definition of Director, employee definition to be referred from dictionary which is mentioned below and employee related law which is also mentioned below because government is talking about integration of various laws and when law to be examined is silent then other laws can be referred.
2) Rajasthan Authority of Advance Ruling in case of Clay Craft India Pvt Ltd (RAJ /AAR/2019-20/33 dated 20th Feb 2020)
Facts of the case & Companies Few Key Points
The applicant is engaged in the manufacture of bona china crockery, Transfer sheet decalcomania, other utensils items and moulds and die. Directors are working in the company at different level of management in the company and each one of them is holding charge of procurement of raw material, production, quality checks, dispatch, accounting etc.
Directors are also working as an employee of the company for which they are being compensated by the company by way of regular salary and other allowances as per the company policy and as per their employment contract.
The company is deducting TDS on their salary and PF laws are also applicable to their service. Therefore in all practical purposes directors are the employees of the company.
M/S Clay Craft Pvt Ltd are already paying GST under reverse charge mechanism on the commission paid to their Directors as such amount pertain to the services provided by them in the capacity of a Director.
My comments on commission payable to Director
If in the Executive Directors employment contract it is mentioned that apart from salary CTC, they are also entitled to commission calculated on the basis of sales done by them or profit earned by the company because of their service, then the said can also be considered as outside the ambit of GST.
The company has submitted that services provided by an employee to his employer are under clause I of the schedule III which related to the activities which are not treated either as supply of Services or Goods.
As per Cambridge Dictionary an employee is “someone who is paid to work for someone else”.
The employees’ state insurance corporation (General Provident fund) Rules 1995 also defines the employee as per clause 2 (e) “Employee” means a person appointed to or borne on the cadre of the staff of the corporation, other than persons on deputation.
We have already seen definition of Director as per companies act above.
These definitions mentioned above makes it clear that directors of our company is in the employment of the company and his services would be excluded from the provisions of CGST Act 2017 by way of exclusion provided in clause 1 of the schedule III.
Findings, Discussions and Ruling
It is held that consideration paid to the Directors is against the supply of services provided by them to the applicant company and are not covered under clause (I) of the schedule III to the CGST Act 2017 as the Directors are not the employee of the company. In the instant case Director is the supplier of services and the applicant company is the recipient of the services. So it is very clear that the services rendered by the Director to the company for which consideration is paid to them in any head is liable to pay GST under RCM as per entry no. 6 of Notification No. 13/2017- Central Tax (Rate) dated 28-06-2017 issued under section 9(3) of the Central Goods and Services Tax Act 207. Notification No. 13/2017- Central Tax (Rate) dated 28-06-2017 has given the distinct identity to the services provided by the Director and specifically included in the category of service on which GST will be payable under RCM.
My comments on above Ruling
Here also why Directors are not considered as employees is not dealt with and on the contrary it was told that Notification No. 13/2017- Central Tax (Rate) dated 28-06-2017 has given the distinct identity to the services provided by the Director and specifically included in the category of service on which GST will be payable under RCM.
Applicability of Advance Authority Ruling
As per Section 103 (1) The Advance Ruling pronounced by the Authority or the Appellate Authority under this chapter shall be binding only on the applicant who has sought it in respect of any matter referred to in Section 97 (2) for Advance Ruling & on the concerned officer or the jurisdictional officer in respect of the applicant.
3) Karnataka Authority of Advance Ruling in the case of M/S Anil Kumar Agrawal (KAR ADRG 30/2020 dated 4th May 2020)
Facts of the case
The Applicant is an unregistered person and is in receipt of various types of income/revenue mentioned as under:
b) Salary as a director from Private Limited Company.
Out of a) to u) we are discussing only salary as a director from Private Limited Company so only b) is reproduced above & we will discuss only the same.
Applicant’s interpretation of Law
The income received towards salary as Director from a Private Limited Company are not included in the purview of GST as the same needs to be treated neither as supply of goods nor as supply of services.
Discussion, Finding & Ruling
The applicant an unregistered person is in receipt of various types of income and intend to know whether the income so received in each type is included in the Aggregate Turnover, for the purpose of registration under the provisions of GST Act.
“Aggregate Turnover” in terms of section 2 (6) of the CGST Act, 2017 which reads as under:
“Aggregate Turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.
It could be seen from above that the aggregate turnover is the sum of different supplies. Therefore any income to be included in aggregate turnover nerds to be related to any transaction that amounts to supply in terms of section 7 (1) (a) of the CGST Act 2017.
Section 7 (1) (a) of the CGST Act 2017 stipulates that any transaction must consist of the following three components to get qualify as Supply:
i) The Transaction must involve a supply, of goods or service or both, such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made.
ii) The Transaction must be for a consideration by a person.
iii) The Transaction must be in the course or furtherance of business.
Salary received as Director from a Private Limited Company
The applicant is in receipt of certain amount termed as salary as Director of a private limited company. Two possibilities may arise with regard to the instant issue of amount received by the applicant. The first possibility that the applicant is the employee of the said company (Executive Director), in which case the services of the applicant as an employee to the employer are neither treated as supply of goods nor as supply of services, in terms of Schedule III of CGST Act, 2017. The remuneration received by the applicant as Executive Director is not included in the aggregate turnover, as it is the value of services supplied by the applicant being an employee.
The second possibility that the applicant is the nominated director (non-Executive Director) of the company and provides the services to the said company. In this case the remuneration paid by the company is leviedto GST in the hands of the company under reverse charge mechanism under section 9(3) of the CGST Act 2017, under entry no. 6 of Notification No. 13/2017, Central Tax (Rate) dated 28-06-2017. Thus the value of the said services of the applicant being a Non- Executive Director are included in the aggregate turnover, as it is the value of the taxable services supplied by the applicant, though the tax is discharged by the private limited company under reverse charge mechanism.
Conclusion:
1) Directors Remuneration payable to Executive Director/ whole-time Director / Managing Director is exempt from GST as per Schedule III, clause 1, of Central Goods and Service tax Act 2017, services by an employee to the employer is covered in activities or transactions which shall be treated neither as a supply of goods nor a supply of services.Therefore it is utmost important that employment contract with employees including executive director/whole-time director/managing director should be drafted carefully clearly mentioning scope of services and break up of cost-to-company shall be also given.
2) In my opinion commission payable to executive director/whole time director/managing director is also treated as part of salary so the same is also outside the ambit of GST, however it is advisable that terms of employment contract should mention when the same is payable and how to determine quantum of commission payable to avoid litigation.
3) GST will be payable by the company or by the body corporate on reverse charge basis against services received by them from non-executive director/nominee director/independent director like directors sitting fees for attending board meeting, amount payable towards services provided by them relating to policy making and planning services etc. as per entry no 6, Notification No 13/2017- Central Tax (Rate) dated 28-06-2017 issued under section 9(3) of the Central Goods and Services Tax Act 207 because employer and employee relationship is not present here.
4) Karnataka Authority for Advance Ruling in the case of M/S Alcon Consulting Engineering (India) Pvt Ltd and Rajasthan Authority of Advance Ruling in the case of Clay Craft India Pvt Ltd has held that Directors Remuneration is taxable on reverse charge basis as per entry no 6, Notification No 13/2017- Central Tax (Rate) dated 28-06-2017 issued under section 9(3) of the Central Goods and Services Tax Act 2017. They have simply stated that Directors are not employees of the company so Directors Remuneration is taxable under GST on Reverse charge basis without giving reasons why they are not considered as employee of the company. Therefore Government should clarify this burning issue to avoid unnecessary litigation as Governments intention is not to levy tax on services provided by an employee to employer under GST. So Directors remuneration is also outside the ambit of GST when employer and employee relationship is existing.
5) Recently Karnataka Authority of Advance Ruling in the case of M/S Anil Kumar Agrawal (KAR ADRG 30/2020 dated 4th May 2020) has given favorable decision though question was relating to whether salary received as Director from Private Limited Company is to be included in Aggregate Turnover or not for the purpose of registration but in the said ruling it is also held that that Salary received as Director from a Private Limited Company in a case where the applicant is the employee of the said company (Executive Director), in which case the services of the applicant as an employee to the employer are neither treated as supply of goods nor as supply of services, in terms of Schedule III of CGST Act, 2017. And in a case where the applicant is the nominated director (non-Executive Director) of the company and provides the services to the said company, in that case the remuneration paid by the company is leviedto GST in the hands of the company under reverse charge mechanism under section 9(3) of the CGST Act 2017, under entry no. 6 of Notification No. 13/2017, Central Tax (Rate) dated 28-06-2017.
6) As per Section 103 (1) The Advance Ruling pronounced by the Authority or the Appellate Authority under this chapter shall be binding only on the applicant who has sought it in respect of any matter referred to in Section 97 (2) for Advance Ruling & on the concerned officer or the jurisdictional officer in respect of the applicant. Therefore both adverse judgment mentioned above will not be binding on other assessee’s. However because of two adverse judgments litigations are bound to happen. Further, the third recent favorable Karnataka AAR ruling mentioned above will be beneficial to assessee.
Prepared by CA Jinesh P. Gada, B.Com, ACA, ISA, M.B.A., DIP IFR (U.K.), email id cajineshgada@gmail.com, Mobile No 9930737859.
Author Bio
The Ruling by Karnataka AAR in Anil Kumar Agrawal dt 04.05.2020 says Remuneration to Non-Executive Director is not exempt from GST. Hence, Remuneration should be included as part of his Aggregate Turnover for the purpose of his GST Regn.
Is it correct?