Introduction
Generally, under GST provisions, the liability to pay tax rests on supplier. However, in certain cases the liability to pay GST to the government falls on the recipient. This is known as reverse charge mechanism which is covered under Notification No. 13/2017- Central Tax (Rate). According to the said notification, services supplied by a director of a company or a body corporate to the said company or the body corporate are covered under RCM provisions (liability to pay tax falls on the company or body corporate)
Schedule III to CGST Act 2017 covers activities or transactions which shall be treated neither as a Supply of Goods nor a Supply of Services. Services by an employee to the employer in the course of or in relation to his employment are covered under Schedule III (not taxable under GST).
AAR Rulings pertaining to services provided by directors: –
1. AAR of Karnataka in case of M/s. Alcon Consulting Engineers (India) Pvt. held that the remuneration to the Directors paid by the applicant are not covered under 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 section 2(93) of the CGST Act and the supplier of such service is the Director. Hence, the company is liable for the payment of GST under RCM.
2. AAR of Rajasthan in case M/s Clay Craft India Private Limited which has held a similar view as held by AAR in case of Alcon Consulting Engineers (India) Pvt herein above despite the fact that directors are also working apart from working as Board of Directors. They are working as an Employee of the company where salary is regularly paid to the directors. TDS is also being deducted as applicable on salary u/s 192. Despite it all, it was held that director is not the employee of the company and the Consideration paid to director is covered under RCM.
Circular No: 140/10/2020 – GST was introduced to provide Clarification in respect of levy of GST on Director’s remuneration in order to avoid contradictory scenarios like above rulings. The provisions covered in this circular are as below: –
| Directors | Is it covered under Schedule III | Taxability |
| Directors who are not the employees of the company [Independent directors] | No | Taxable on RCM basis in the hands of the company |
| Directors who are employees functioning according to the contract of employment Where TDS under Income Tax law is deducted u/s 192 (salary payment) | Yes | Not Taxable |
| Directors who are employees, but are not functioning according to the contract of employment Where TDS under Income Tax law is deducted u/s 194J (payment of professional fees) | No | Taxable on RCM basis in the hands of the company) |
Points to be noted: –
1. A Whole Time Director may or may not be the employee – As per section 2(94) of the Companies Act, 2013 a whole time-director is an inclusive definition, and thus he may be a person who is not an employee of the company
2. Section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it clear that an independent director should not have been an employee or proprietor or a partner of the said company, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.
3. Directors function in dual capacity – capacity of director and in capacity of employee. Test would be whether it is a “contract for service” (i.e., professional service) or “contract of service” (i.e., employment contract).
FAQ’s on GST liability on Director of Company
Q 1.Who are Directors of a company?
Ans: The directors are the persons elected by the shareholders to direct, conduct, manage or supervise the affairs of the company.
According to Sec. 2 (13) of the Companies Act, “Director includes any person occupying the position of director by whatever name called.”
Q 2. What do you mean by an independent director?
Ans: Section 2(47) of the Companies Act states that an ‘independent director’ means an independent director referred to in Section 149(6). Section 149(6) provides with a descriptive list of qualifications of an independent director.
Q 3. Can an employee be appointed as an independent director of the company?
Ans: Independent director cannot be an employee, proprietor or a partner of the said company, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.
Q 4. What do you mean by a whole-time director?
Ans: “Whole-time Director” includes a director in the whole-time employment of the company. The definition of ‘whole-time director’ is an inclusive definition, so he may not be an employee of the company too.
Q 5. What do you mean by a managing director?
Ans: The Board of Directors generally appoints one of its members to manage the affairs of the company as a whole-time officer and calls him the Managing Director. The Managing Director occupies a position of dual authority and responsibility. As a director, he attends the Board meetings and, as a manager, he performs the managerial functions.
Q 6. What is an important test to determine whether GST is leviable on services provided by directors?
Ans: The following criteria needs to be fulfilled in order to not constitute as a supply under GST: – ‘
i. Employer-employee relationship (master servant relationship)
ii. TDS is deducted u/s 192
iii. It should be a contract of service and not a contract for service
Q 7. How are services provided by a whole-time director to a body corporate covered under GST?
Ans: Here, it is essential to note whether the services provided by the whole-time director are in accordance of a contract of employment or not.
1. If the whole-time director is working according to a contract of employment, services provided do not constitute as a supply under GST. Hence, not taxable.
2. If the whole-time director is not working according to a contract of employment, services provided constitute as a supply under GST. Consideration received by the director is taxable on RCM basis in the hands of the company
Q 8. How are services provided by an independent director to a body corporate covered under GST?
Ans: Services provided by an independent director constitute as a supply under GST as there is no employer-employee relationship. Consideration received by the director is taxable on RCM basis in the hands of the company.
Q 9. Mr. A is a director employed by XYZ Pvt Ltd under the terms of an employment contract. Mr. A received salary of Rs 10 lakhs during the year. Is this consideration taxable under GST?
Ans: Services provided by Mr. A are in terms of the employment contract. There is employer-employee relationship in this case. These services will not be considered as supply under GST. Hence, not taxable.
Q 10. How are services provided by a managing director to a body corporate covered under GST?
Ans: It is essential to find out whether the services provided by the managing director are in accordance of a contract of employment or not.
1. If the managing director is working according to a contract of employment, services provided do not constitute as a supply under GST. Hence, not taxable.
2. If the managing director is not working according to a contract of employment, services provided constitute as a supply under GST. Consideration received by the director is taxable on RCM basis in the hands of the company.
Q 11. What is the GST payable on services provided by directors when they constitute as a supply under GST?
Ans: GST Rate payable by receiver (company or body corporate) is 18%.
Q 12. Who can avail the benefit of Input Tax Credit (ITC) on services provided by a director to a company or body corporate?
Ans: The question of availing ITC does not arise on cases which do not constitute as a supply under GST (employer-employee relationships).
The recipient (company or body corporate in this case) can avail ITC of GST amount that is paid under reverse charge on receipt of services (cases where employer-employee relationship does not exist)
Q 13. What is the time of supply for supply of director’s services when they are covered under RCM?
Ans: Time of Supply shall be earliest of: –
1. the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier
2. 61st date from the date of issue of invoice
If it is not possible to compute time of supply using above method, the time of supply shall be the date of entry in the books of account of the recipient of supply.
Q 14. Mr. P is a director of ABC Pvt Ltd. On payment of consideration to Mr. P, ABC Pvt Ltd deducts TDS u/s 192 of Income Tax Act (TDS on salary). IS GST chargeable on this amount?
Ans: Services provided by Mr. P are in terms of the employment contract. There is employer-employee relationship, which is proved by the fact that TDS is deducted u/s 192. These services will not be considered as supply under GST. Hence, not taxable.
Q 15. Mr. Q is a director of ABC Pvt Ltd. On payment of consideration to Mr. Q, ABC Pvt Ltd deducts TDS u/s 194J of Income Tax Act (TDS on professional fees). Is GST chargeable on this amount?
Ans: Services provided by Mr. Q constitute as a supply under GST as there is not employer-employee relationship, which is proved by the fact that TDS is deducted u/s 194J. Consideration received by the director is taxable on RCM basis in the hands of the company.
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