GST on directors remuneration has been a contentious issue lately. The matter has been sought before various Authority of Advance Rulings and varied decisions have been received.
Recently advance ruling was provided by AAR – Rajasthan in the matter on Clay Craft India Private Limited wherein the question sought for advance ruling was upon applicability of payment of tax on RCM basis on remuneration to directors including whole time directors. All logical arguments were provided by the applicant stating that director of the company is also in employment of the Company. The summary of arguments provided by the applicant is provided herein below:
- Directors file their IT returns showing the remuneration as ‘Income from salaries’
- Directors are working as employees of the Company (as whole time directors) and 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 EPF from the salary of directors.
- Cites definition of employees from Companies Act, EPF Act, ESI Act which states that director can be employee of the Company.
- Cites case law from Karnataka HC : Regional Director, E.S.I. v. Sarathi Lines (P) Ltd. [1998] ILLJ 28
As per GST laws, services provided by an employee to its employer in the course of employment is neither classified as goods or services and therefore GST is not leviable on such services.
However, despite providing the logical interpretation of the matter, the AAR-Karnataka held that directors are not the employee of the Company and any services rendered by the director is taxable in the hands of the company on reverse charge basis. This ruling was made without giving any reason or logic as to why the director is not considered as employee of the Company.
However in another ruling, AAR- Karanataka in the matter of Anil Kumar Agarwal has given an otherwise decision. The Authority observed that for any person who receives salary as a director of a company, there are two possibilities. Firstly, the applicant is the executive director of the said company and has received salary in the capacity of an employee, in which case the services of the direct as an employee to the employer are neither treated as supply of goods nor as supply of services in GST laws. Secondly, the director 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.
The Authority held that the remuneration received by executive director is not includible in the aggregate turnover, as it is the value of the services supplied by the director being an employee. On the other hand, the value of the services provided by non-executive Director are includible in the aggregate turnover, as it is the value of the taxable services supplied by the such director, though the tax is discharged by the company, under reverse charge mechanism.
Therefore, in our opinion, the Company may not pay tax on reverse charge basis on remuneration to whole time directors who are in employment of the Company. However, this may lead to future litigation and involve cost to the Company. Further, advance ruling is applicable only on the registered person who has sought for such ruling and not upon any other taxpayer. It is not binding upon other taxpayers. The ruling can be considered for reference purpose only.
There are several case references which states that director of the Company is also the employee of that Company under ESI Act, Income Tax Act. The references are provided herein below:
- Employee’s State Insurance Corporation V. Venus Alloy Pvt. Ltd. [SC] Civil Appeal No. 1464 OF 2019
- M. Salgaocar And Bros. Pvt. Ltd. vs Commissioner Of Income Tax Etc [SC] 2000 (2) SCR 1169
- Sishu Ranjan Dutta And Anr. vs Bhola Nath Paper House Ltd. [Calcutta HC] 1983 53 CompCas 883 Cal
Thus, there is a lot of ambiguity revolving around this issue as there is no concrete decision upon this vexed issue. The CBIC and GST Council should take up this matter and issue a clarificatory circular. Else this matter will be litigated further till it reaches Hon’ble Supreme Court – the highest level of judiciary in India, where only it will be put to rest.
Disclaimer: The content of this article provides a general guidance upon the subject matter. This is the opinion of the author. Specialist advice should be sought about any specific circumstances.
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