Recently, the Rajasthan Authority of Advance Ruling (‘AAR’) has issued a ruling in the matter of Clay Craft India whereby AAR has interpreted the definition of ‘supply’ and provisions of reserves charge very differently. The AAR has levied GST under reverse charge mechanism (‘RCM’) on salary payments made to directors and has failed to distinguish between the role performed by directors as an employee and as a service provider. Also, the ruling has created an anomaly in the minds of taxpayers and tax authorities as well.
The topic has been divided into four parts: (1) Discussion about ruling; (2) GST provisions – Services by employees to employer (3) Provisions of other statues and (4) Comments
1. Analysis of the ruling
♦ Facts of the case:
- M/s Clay Craft India Pvt. Ltd. (hereinafter referred as the ‘applicant’) is engaged in the business of manufacturing of bone Chine crockery, Transfer Sheet Delcomania, other utensil items and moulds & dies.
- Further, the Applicant has 6 directors on board and they are holding charge of procurement of raw material, productions, quality checks, dispatch, accounting, etc. These directors are getting salary and other allowances as per company policy and employment contract. Also, applicant deducts TDS and PF from salary and salary paid to directors has been disclosed as “Income from salary” in their income tax returns.
- In addition to the above, the applicant also makes the payment of commission to directors and GST under RCM has been discharged on the same. Also, directors who are getting salary from the applicant are also part time directors in other company.
♦ Advance Ruling sought for:
- Whether GST under RCM is applicable on salary payment made to directors as per employment contract and
- If these directors are part-time directors in any other company, whether GST is payable under RCM on salary
♦ Ruling by the AAR:
- The AAR has held that GST under RCM is applicable on consideration paid to directors as directors are not employees of the company but they provide services to company and hence, benefit of schedule III of the CGST Act is not available.
2. Relevant GST provisions
- Section 7 of the CGST Act (‘CGST Act’) provides that supply of goods or services made or agreed to be made for a consideration by a person in the course or furtherance of business shall constitute ‘supply’ and liable to GST.
- Further, section 7(2) of the CGST Act provides that activities provided under schedule III are neither treated as supply of goods nor supply of services and sr.no 1 to the said Schedule III includes ‘services by an employee to the employer in the course of or in relation to his employment’.
♦ Reverse charge mechanism
- Also, Section 9(3) of the CGST Act read with sr no. 6 of notification no. 13/2017-CT(Rate) dated June 28, 2017 provides that GST under RCM is applicable on services provided by the directors of company or body corporate to said company or body corporate.
- Thus, the above provisions provide that if services are provided by directors in the capacity of employees, then the same covered under schedule III of the CGST Act and hence, no GST is payable on the same. However, if the services are provided by directors are not in the capacity of employee or not in course of employment, then GST is payable under RCM by the company
3. Provisions of other statues:
♦ Service tax (Chapter V of the Finance Act, 1992)
- Under erstwhile service tax regime, services provided by the employee to employer was exempt under the definition of ‘service’ provided u/s 65(B) (44) of the Finance Act, 1992.
- Further, service tax under RCM on services provided by the directors was introduced in negative tax regime. Master RCM notification no. 30/2012-Service tax dated June 20, 2012 was amended vide notification no. 45/2012-Service tax dated August 7, 2012 to provide GST under RCM on services provided by the directors.
- In this regard, there are important CESTAT rulings by the CESTAT, Mumbai. In case of Allied Blenders and Distillers Pvt. Ltd. Vs. CCES, Aurangabad, Mumbai CESTAT has held that directors who were concerned with the management of the company, were declared to all the statutory authorities as employees of the company. Also, Form-16 was issued to the directors and TDS as per the provisions of Income-tax Act and Provident Fund as per EPF Act was also deducted from salary indicating the director as an employee of the company. Further, Income-tax authorities also treated the director as an employee of the company. Therefore, amount paid to directors as ‘salary’ cannot be classified as fees for rendering services and hence, no service tax payable for ‘salary’ payment made to the director.
- Also, in case of NRB Industrial Bearings Pvt. Ltd. V. CCE, Aurangabad, the Mumbai CESTAT has held that payment of perquisites in addition to salary does not form part of consultancy service, if said payment has been made towards routine work as a Managing director and hence, said payment forms part of salary and no service tax is payable on the same.
“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”
♦ Companies Act, 2013
“The Finance Act 2012 has introduced Service Tax which is applicable to anyone who provides a service not covered under the negative/exempted list and if the value of annual revenue is more than Rs. 10 lakhs. The Non-Whole Time Directors of the company are presently not covered under the exempted list and as such, the sitting fees/commission payable to them is liable to Service Tax. Service tax is payable on the commission/sitting fees payable to Non-Whole Time Directors of the company.”
- The above circular clarifies that exemption from the definition of ‘service’ provided to services by employee to employer is not applicable, in case of services provided by Non-Whole Time Directors to the company and hence, any director other than Non-Whole Time Directors should be considered as an employee of the company.
The AAR, in the captioned ruling, has disregarded the concept of employee-employer relationship that exists between the Director and the Company and held that any consideration paid to director in form of ‘salary’ is liable to GST under RCM in the hands of the company.
- The judicial precedents under service tax regime and circular issued by the Ministry of Company Affairs provides that remuneration which is paid to the Directors in the course of or in relation to their employment is outside the purview of GST net and the company is not liable to pay be liable to pay GST under RCM.
- In view of the above, it is pertinent to note that if payment of salary & perquisites to directors (Managing director, Whole-time director or Executive director) is in course of or in relation to employment contract with the company, said payment should be classified as ‘salary’ and hence, covered under schedule III of the CGST Act and no GST under RCM is payable on said payment.
- However, if the payment of sitting fees or commission to director (Non-Whole-Time director) for any service supplied to the company, the said payment attracts GST under RCM in the hands of company.
- Thus, the Company should examine the contract entered with the directors and if the consideration payable to directors is NOT in course or in relation to employment, then only GST under RCM is applicable.
- It is pertinent to note that the captioned ruling is applicable to the applicant and jurisdictional officer, however, CBIC should issue suitable clarifications so that doubts arising in the minds of registered persons can be resolved.
2. [TS-896-CESTAT- 2018-ST]
(The views expressed are strictly personal)