There has been a big controversy regarding the liability of GST on Directors Remuneration under Reverse Charge. Various conflicting Advance Rulings has been issued by Authority for Advance.
In Re: M/s. Alcon Consulting Engineers (India) Pvt. Ltd. [2019 (10) TMI 793] – Authority for Advance Ruling, Karnataka observed and held that the remuneration to the Directors paid by the applicant are 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 DirectorsȂ 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.
Further, again in the case of M/s Clay Craft India Private Limited [RAJ/AAR/2019-20/33], the advance ruling authority for Rajasthan uphold the above view.
However, it may be noted that in both the aforementioned advance rulings the ld. AAR without specifically disproving the submissions and contentions of the applicant held that Directors are not employees of the Company and GST should be paid under reverse charge on any payment to the directors.
In a contradictory ruling in the case of M/S. ANIL KU MAR AGRAWAL [2020 (5) TMI 221], Advance
Ruling Authority of Karnataka, has classified the payments received as Director into two parts. It states that;
“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 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 exigible to 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.
In the instant case the applicant has not furnished any documentary evidence such as copy of agreement between the applicant and the said private company, copy of appointment order, details of ESI, PF deductions etc., so as to decide whether the applicant is in receipt of salary as an employee or as an independent director. Thus, in the absence of any documentary evidence, it is not possible to decide whether the amount received by the applicant is towards his services as an Executive Director or a Non-Executive Director.
In view of the above, the remuneration received by the applicant as Executive Director is not includable in the aggregate turnover, as it is the value of the services supplied by the applicant being an employee. Further, if the applicant receives the remuneration as a Non-Executive Director, such remuneration is liable to tax under reverse charge mechanism under section 9(3) of the CGST Act 2017, in the hands of the company, 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 includable 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”.
Recently, the CBIC has issued Circular No: 140/10/2020 – GST dated 10-06-2020 in order to clarify the position in this regard.
In the Circular, the remuneration to directors has been examined under following two different categories:
a) 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
b) leviability of GST on remuneration paid by companies to the whole-time directors including managing director who are employees of the said company.
a) Leviability of GST on remuneration paid by companies to the independent directors or those directors who are not the employee of the said company
The primary issue to be decided is 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:
♦ 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.
♦ 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 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.
Accordingly, it is hereby clarified that the remuneration paid to such independent directors, or those directors, by whatever name called, who are not employees of the said company, is taxable in hands of the company, on reverse charge basis.
b) Leviability of GST on remuneration paid by companies to the directors, 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. under a contract of service (employment) entered into with the company.
It is also pertinent to note that the treatment of the Director’s 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 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 194J of the IT Act.
Accordinglyǰ it is 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.
Controversy Created by Clarifications issued by Circular
As per Entry No. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28-06-2017, the services supplied by a Director of company to a company are liable to GST under reverse charge mechanism. Thus, there was one school of thought as per which only services provided in the capacity of a director shall only be exigible to GST under reverse charge mechanism. For illustration, there can be numerous services which can be provided by a director to a company like renting of space, right to use IPR, renting of tangible asset, etc. Since these services are provided by a director in a capacity other than as a director or employee, these shall not be liable to GST under reverse charge mechanism.
However CBIC Circular has taken a different view and 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. Thus, a view may come up that all services provided by a director to company whether in the capacity as director or otherwise shall be liable to GST under reverse charge.
The various open issues which have remained unanswered in the circular are;
♦ What constitutes employer-employee relationship is nowhere defined in the circular. As per the circular, if the company is deducting TDS u/s 192 then it will be considered as remuneration to the director as an employee and will not be liable to GST.
♦ The circular only clarifies only in respect of remuneration provided in lieu of Professional services where TDS is deducted u/s 194J that the company is liable to pay GST under reverse charge. What will be fate of the various services which director may be providing in capacity other than director and not covered under the scope of Professional services? For instance renting of space, right to use IPR, renting of tangible asset, etc.
The clarifications issued by Circular recently CBIC has created a more confusion than clarifications. The services provided by a director in the capacity of employee shall not be liable to GST as per Sch III to Sec 7 of CGST Act. However, if any other service is provided by a director whether in the capacity of director or otherwise shall be liable to reverse charge.
Although the above view taken by the circular does not seems to be completely correct, but in order to avoid litigation, the company make take a view to pay the GST under reverse charge on all the services provided by a director, other than as an employee including rental services and claim ITC on the same subject to its eligibility to claim 100% ITC.
The views expressed in this article are personal views of the Authors. This article includes general information about legal issues and developments in the law of GST in India. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this article to the fullest extent permitted by law.
|CA. Chitresh Gupta
FCA, LL.B, B. Com(H)
Co-Author of book “GST –Law, Analysis &
Procedures”Faculty on Goods & Services Tax by ICAI
|CA. Shilpi Gupta
FCA, M.Com, B.Com(H) -SRCC
Co-Author of book “GST –Law, Analysis & Procedures”
Faculty on Goods & Services Tax by ICAI