In terms of the notification No. 13/2017 – central Tax (Rate) dated 28.06.2017– To notify the categories of services on which tax will be payable under reverse charge mechanism under CGST Act, Services supplied by directors of the company or a body corporate, located in taxable area, to the said company or body corporate will attract reverse charge.
Various reference were received by the CBIC seeking clarification on whether the remuneration received by director will fall within the ambit of GST under reverse charge.
To clarify the confusion, CBIC via circular No. 140/10/2020-GST dated 10-06-2020, issued a clarification in this regard.
Following are the 12 simplified pointers of the notification to ensure that no GST be levied on the remuneration being paid to the directors of the company or the body corporate:
1. Check whether the director is an Independent director as defined in section 149(6) of the Companies Act, 2013. In such cases any remuneration paid to them will fall under supply attracting reverse charge and GST will be paid by the company or the body corporate (Being the service recipient)
2. Check whether the director receiving the remuneration is a Non executive director. Non Executive directors are the directors who are not full time directors of the company or body corporate. Thus, they are not the employees of the company. Hence, any services supplied by them for which they will receive remuneration, will attract GST on reverse charge basis.
3. Here, it is also pertinent to note that TDS under section 194J(1)(ba) applies on any remuneration, fees or commission by whatever name called, paid to Independent directors or the Non Executive Directors.
4. Ascertained whether director is an employee of the company, i.e such director is a executive director (managing director, whole time director, who is in whole time employment of the company). One can refer Rule 2(k) of the Companies Rules 2014 for definition of executive director.
5. Once it has been ascertained that the director is an employee of the company, check whether the director is functioning in dual capacity namely as an employee and the other on the basis of the contractual relationship.
6. To make such an identification, circular issued by CBIC refer to Income Tax Act, 1961.
7. Salary paid to any Executive Director (whole time director, Managing director) are subject to TDS under section 192. Thus, any remuneration to executive directors declared as “Salary” in the books of the company and subject to TDS under section 192, 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 schedule III of the CGST Act, 2017
8. However, any remuneration, fees or commission by whatever name called, declared separately, other than “salaries” in the books of the company and subject to TDS under section 194J, will be liable to GST and in terms of the notification issued on 28.06.2017, the recipient of the said services i.e the company or the body corporate, is liable to discharge the GST on reverse charge basis.
9. Here it is important to note that GST on reverse charge basis if attracted will only be in cases where services are provided by such directors in the capacity as director and not in any other capacity (Individual capacity) like:
In above cases, Director, being the supplier of taxable supply, will be liable to pay GST under forward charge, in case he crosses the threshold limit of aggregate turnover in FY for registration
10. In line with the notification and the circular, one can interpret that sitting fees paid to the directors under section 197(5) of the Companies Act, 2013 will attract GST on reverse charge basis as the same is subject to TDS under section 194J(1)(ba).
11. Further sitting fees is usually paid to Non executive directors including independent directors for attending the meeting and not to executive directors. Although the Companies Act is not specific in this regard. It is a general practice to specify a clause of nonpayment of sitting fees to executive directors in their contracts at the time of appointment.
12. To ensure whether the director is an executive director or non executive, one can refer to Spice Part-B form filed with ROC at time of incorporation, DIR-12 at time of appointment of director.
Disclaimer : This article is solely for educational purpose and cannot be construed as legal and professional opinion. It is based on the interpretation of the author and are not binding on any tax authority. Author is not responsible for any loss occurred to any person acting or refraining from acting as a result of any material in this article.