A company is a legal entity and does not have any physical existence. It can act only through natural persons who run its affairs. Companies Act, 2013 defines the term “Director” as someone appointed to the Board of a company to act on behalf of the company.
A director can either be an employee of the company or not. It depends upon the nature of his employment, referring to the Article of Association and Service Agreement etc. A director can be an executive or non-executive director. An executive director (e.g. Managing Director or Whole-time Director) takes responsibility for managing different business operations of the company in a smooth manner. A non-executive director (e.g. independent director, nominee-director etc.) participates in board meetings and discusses topics related to policy framing for the effective management of the company’s affairs. He/she is not responsible for day to day affairs.
I am analyzing the applicability of the GST provisions under the current regime on Director remuneration with a reference to the erstwhile Service Tax regime, Companies Act, 2013, Income-tax Act, 1961 and other relevant laws and case laws cited.
Section 7 (2)(a) of the CGST Act, 2017, read with Schedule III does not include services by an employee to the employer in the course of or in relation to his employment under the definition of Service on which GST is applicable.
Notification No. 13/2017-Central tax (Rate) dated 28-06-2017 which inter-alia provides that services provided by a Director of a Company or a body corporate to the said company or the body corporate is liable to be taxed under RCM in the hands of such company or body corporate. The relevant excerpt from the said notification is given below for ready reference:
|S. No.||Category of Supply of services||Supplier of services||Recipient of services|
|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|
Hence, it can be opined that the services supplied by a director are liable to be taxed, however, in case the director is providing services as an employee to the company it can’t be considered as service and provision of the Act is not applicable on such service. To analyze it in detail, we have to understand the relationship between the company and its directors and an employee and its employer.
Relations between a Company and its Directors
(1) Executive Director (ED): 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 Act”
(2) Whole Time Director (WTD): As per Clause 2(94) of Companies Act, 2013 ““whole-time director” includes a Director in the whole-time employment of the company.
(3) Managing Director (MD): As per Clause 2(54) of Companies Act, 2013 “managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.
(4) Non–Executive Director (NED): Non-executive Director, nowhere described under Companies Act, 2013. However, meaning of non- executive Director can be taken from the definition of executive director. In simple word, a person who is not falling in conditions of definition of ‘Executive Director’ shall be considered as ‘Non-Executive Director’.
(5) Remuneration: As per Sec. 2(78), remuneration means any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961.
After going through the above definitions, we can opine that:
1. The MD shall be considered as the WTD of the Company since he is also in whole-time employment of the company because to manage affairs of the Company and to be in power of management, a person has to give his whole time and attention. Hence, there are two positions that are MD and WTD which can be considered as ED in a company.
2. The WTD shall be considered as ED whether company has designated him/her as ED or not.
3. Remuneration includes all type of payments to a director whether in the form of salary, commission, perquisite, sitting fees, professional fees etc.
Neither the CGST Act nor the Income-tax Act or the Companies Act provides the definition of employer or employee. However, as per the Companies Act, 2013 as analyzed above, MD and WTD should be a whole-time employee of the company. Further, Employees Provident Fund Scheme, 1952 under 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.
While defining the employer-employee relationship, the Apex Court, in the case of Ram Pershad vs CIT, New Delhi, 1973 AIR 637, has held that
There is no doubt that for ascertaining whether a person is a servant or an agent, a rough and ready test is, whether, under the terms of his employment, the employer exercises a supervisory control in respect of the work entrusted to him. A servant acts under the direct control and supervision of his master. An agent, on the other hand, in the exercise of his work, is not subject to the direct control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him from time to time by his principal. ………. It is not possible to lay down any precise rule of law to distinguish one kind of employment from the other. The nature of the particular business and the nature of the duties of the employee will require to be considered in each case in order to arrive at a conclusion as to whether the person employed is a servant or an agent. …….. A managing director may have a dual capacity. He may both be a director as well as an employee. ……, if such be the case, his remuneration will be assessable as salary under section 7. In other words, whether or not a managing director is a servant of the company apart from his being a director can only be determined by the articles of association and the terms of his employment……” (emphasis applied)
A similar view has been expressed by the Scottish Court of Session in Anderson v. James Sutherland (Peterhead) Ltd., where Lord Normand, at page 218, said:
“…… the managing director has two functions and two capacities. Qua managing director, he is a party to a contract with the company, and this contract is a contract of employment; more specifically I am of opinion that it is a contract of service and not a contract for service.”
Hence, it clarifies that the employer-employee relationship between a director and the company depends upon the conditions in the contractual agreement whether it is through the Article of Association or through a separate agreement.
Case laws/Advance Rulings under the GST regime or erstwhile Service Tax regime.
M/s Anil Kumar Agrawal, AR No. KAR/ADRG/30/2020: The Karnataka Authority for Advance Ruling (AAR) decided that
(i) The services provided by the employee of the company (Executive Director), to the employer are neither treated as supply of goods nor as supply of services, in terms of Schedule III of CGST Act 2017.
(ii) In case of a nominated director (non-Executive Director) provides the services to the Company, the remuneration paid by the company is exigible to GST in the hands of the company under RCM u/s 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.
M/s Clay Craft India Pvt Ltd, AR No. RAJ/AAR/2019-20/33, Dated: 20-02-2020: The Rajasthan Authority for Advance Ruling (AAR) observed that
(i) The consideration paid to the Director for the supply of services to the applicant is specifically covered under Notification No. 13/2017-Central tax (Rate) Dated 28-06-2017.
(ii) The consideration paid to the Directors is against the services provided by them to the applicant and are not covered under clause (1) of the Schedule III to the CGST Act.
Allied Blenders and Distillers Pvt. Ltd vs. Commissioner of Central Excise and Service Tax, Aurangabad, Dated: 25-06-2018, ST/87204/2017
The Tribunal noted that from the documents produced viz. Form 16, deductions on account of provident fund, profession tax, it is crystal clear that the 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. Thus, the demand of service tax is set aside.
M/s NRB Industrial Bearings Private Limited vs. CCE & ST, Aurangabad, ST/87483/2018 Dated: 07-08-2019
The Tribunal held that only due to the fact that taxable income is shown in Form 16, it cannot be said that other perquisites are not part of remuneration to the employee and are paid for consultation etc. rendered by him – no case is made out by the department that such remuneration, other than salary paid to him, was not for the routine work he performs as Managing Director, but was for the consultation he provides – therefore, the instant case is squarely covered by the exclusion contained under section 65(44) (b) of Finance Act, 1994 and service tax is not applicable on other perquisites.
After analyzing all the above-mentioned provisions, case laws and advance rulings, we can conclude the applicability of GST under RCM in the different scenarios as follows:
|S. No.||Nature of Payment||Executive Director (MD, WTD) – Employee as per the terms of agreement||Non-Executive Director (independent director, nominee director)|
|1||Remuneration – Salary||No GST||Salary can’t be paid to a non-executive director|
|2||Commission||Considered as Salary – No GST||GST is applicable|
|3||Professional Fees||Considered as Salary – No GST||GST is applicable|
|4||Sitting Fees||Considered as Salary – No GST||GST is applicable|
The ruling in the case of M/s Clay Craft India Pvt Ltd (as cited above) by Rajasthan AAR has considered only the notification issued under RCM & not evaluated the employer-employee relationship as cited in other case laws. However, Karnataka AAR and other rulings under the erstwhile Service Tax regime has not only considered the role of executive and non-executive directors but also gone into details of principal of employment and contractual obligation of an employee.
Based on the above discussion, it can be concluded that in the case of Executive Director (subject to terms of his agreement and conditioned mentioned in Article of Association), RCM under GST is not applicable and in case of non-executive, it is applicable.
It is to be submitted further that such contrary rulings by different state authorities will lead to increased confusion and uncertainty for the taxpayers. It reflects the absence of a centralized AAR system and gives belief to the need of the creation of a centralized authority for advance ruling. The Central Board of Indirect Taxes and Customs (CBIC) is required to provide clear guidelines in respect of such matters to provide certainty till any centralized authority for advance ruling is not constituted.
(The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual)