CA Abhishek Khandelwal
As we all know that company is an artificial person created under law with separate existence but it doesn’t have physical body & mind of its own. The directors are the individuals appointed at higher level to manage business affairs of company. Although shareholders being the owners are physically available but since they are higher in numbers so all of them together may not be able to manage the business of co. & if they do so, there are high chances of mismanagement. That’s the reason the concept of directors came into existence. A director can be executive, non-executive or independent director. An executive director takes responsibility for managing different business operation of company in smooth manner. An independent or non- executive director is not responsible for day to day affairs rather he/she participates through board meetings in discussion relating to policy framing for efficient & effective management of company’s affairs. They are not employee of company & held liable only if they knowingly consented to the wrongful act. The tax treatment under GST regime of remuneration/emoluments paid to the director will depend upon the relationship with Co. & nature of service rendered by them.
Current Provision in GST Law regarding taxability of director remuneration:
As per serial No. 6 of the Notification No. 13/2017- Central Tax (Rate), dated 28-06- 2017, issued under Reverse Charge Mechanism (RCM), service supplied by director of a co. or body corporate to said Co. or body corporate shall be taxable under RCM i.e. company or body corporate is liable to pay GST in respect of such service.
Further, according to serial no. 1 of schedule III of CGST Act, 2017, services provided by employee to employer in relation to employment are outside the realm of supply, hence no GST would be applicable.
In this article an effort has been made to analyzing the various types of director, their nature of engagement in various laws, taxability of consideration received by them in respect of services, judgements of the courts etc.
Advance ruling by Authority of advance ruling, Rajasthan (AAR Rajasthan):
The issue raised by applicant M/s Clay Craft India Pvt Ltd before Rajasthan AAR are as follow:
1. Whether GST is payable under RCM on salary paid to director of Co. as per contract?
2. Whether it would make any difference if such director is also a part time director in any other company?
Applicant’s Submission: – Applicant submitted that directors are working as whole time director & performing their duties as an employee of the company and for which company is paying regular salary and other allowances as per company policy & their employment contract. Also TDS on their salary under section 192 of Income Tax Act 1961 & PF laws are also applicable. In fact these directors are treated at par with any other employee. Hence, it is covered under schedule-III & not liable to pay GST under RCM.
Ruling Pronounced by AAR: – AAR held that director is supplier of service and applicant company is recipient of service. Hence consideration paid to directors, in any head, is against supply of service & not covered in clause (1) of schedule-III of CGST as directors are not employee of company. Therefore, in respect of both the question raised above company is liable to pay GST under RCM.
Advance ruling by Authority of advance ruling, Karnataka (AAR Karnataka):
The issue raised by applicant M/s Anil Kumar Agarwal before Karnataka AAR is as follow:
The applicant is an unregistered person & receives various types of income one of them is salary as a director of private limited company, whether it will considered in aggregate turnover for registration purpose?
Applicant’s submission: – Applicant submitted that any type of salary is outside the scope of GST as it is treated neither supply of goods nor supply of service. Therefore, salary as a director of private limited company is not includable in aggregate turnover.
Ruling Pronounced by AAR: – AAR held that if the applicant is employee of the company i.e. executive director then in such case it is employee-employer relationship & therefore service supplied by the applicant neither treated supply of goods nor supply of service in terms of schedule-III of CGST Act, 2017 and consequently not includable in aggregate turnover.
Further, if the applicant receives remuneration as non-executive director of company then in such case remuneration paid by company is liable to GST in the hands of company under RCM under section 9(3) of CGST Act,2017. Consequently, it is includable in the aggregate turnover of applicant as it is the value of taxable service supplied by the applicant, though tax is paid by company under RCM.
The taxability of director remuneration under GST law should be determined on the basis of appointment terms, copy of agreement between director & company, principle of whether a director is employee or not, details of statutory deduction such as PF, ESI, and TDS etc. It is important to note that GST law has not defined the terms “director” & “employee”. Hence we have to look towards reference of other law.
|Companies Act, 2013||Income Tax Act, 1961||Other Laws/Judgements|
|Section 2(34) says “director” means a director appointed to the Board of a company.
Section 2(94) says that whole-time director (WTD) includes a director in the whole-time employment of the company.
Non-executive director is nowhere defined under companies Act but executive director is defined. As per rule 2(k) of 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.
So from the above definition we can say that WTD will always be executive director & vice-versa.
But as we all know that non-executive director do not take part in the day to day activities of company, they only participate only in board meetings & work only at a periodic interval on part time basis, hence they cannot be treated employee of company.
Directors are entitled to remuneration for the service rendered by them. Section 2(78) says that “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.
Directors other than WTD or MD are entitled to receive sitting fee for attending the board or committee meetings. Even if sitting fee is to paid to WTD or MD it will treated other allowance & will be subject to managerial remuneration limit prescribed under schedule-V of the Act.
|Every payment made by employer to employee for service rendered would be chargeable to tax as salary only if there is employer-employee relationship exists between payer & payee. Once the employer-employee relationship established income is to be charged under the head salary irrespective of the fact whether the employee is full time or part time.
The nature of director’s employment can be determined from Articles of Association (AOA) of company, terms of service agreement etc.
For example if AOA provides power to remove any director, if his work is not satisfactory, before expiry of his term by passing of extraordinary resolution then such director shall be treated employee of the company.
If a person performs his duties as per his own discretion and principal only exercise supervisory control in respect of work, then such person will not be treated employee and any remuneration, fee, commission by whatever name called will be chargeable under the head “Profit & gains from business and profession” and TDS u/s 194J would be applicable.
So it can be said that if relationship of master servant exists between company & director then only director will be treated as an employee.
|In ESIC vs Apex Engineering, SC held that MD is employee of company.
In ESIC vs Venus Alloy Pvt Ltd, SC held that Directors of a company, who are receiving remuneration, would fall within the definition of employee as per section 2(9) of the ESIC Act.
In erstwhile service tax regime, service rendered by employee to employer in relation to his employment were outside the scope of service tax, hence no service tax was levied if remuneration was paid for day to day routine work not for consultancy services.
In one of the judgement of service tax regime (Allied Blenders and Distillers Pvt Ltd), it was held that company paid remuneration to its WTD for managing routine affairs and also made deduction of PF, TDS etc and declared these directors to all statutory authority as an employee of the company. Hence remuneration paid to them was treated as salary.
As per MCA circular 24/2012, Remuneration/fee/commission paid to Non-WTD covered u/s 309(4) of Companies Act 1956 was liable to service tax as the same was not covered in exemption list. So from this circular it can be indirectly said that remuneration/fee to WTD will not attract service tax.
Based on the above principles cited in various Acts, judgements given by courts it can be concluded that consideration other than sitting fee paid to whole time director will be treated part of salary and not liable to GST i.e. to be kept outside the purview of GST.
Ruling pronounced by Rajasthan AAR implied that it only took into consideration only notification issued under RCM & not evaluated the issue from the view-points cited in other laws.
While ruling pronounced by Karnataka AAR seems fair as against the ruling of Rajasthan AAR as it said that only remuneration paid to non-executive or independent directors will be liable to GST.
But such contrary rulings by different state authorities will lead to increased confusion & uncertainty for the taxpayers. Suppose a taxpayer is doing business in both Rajasthan & Karnataka are under dilemma as to which ruling would be made applicable to them.
Such contrary rulings gives more credence to the need of creation of national appellate authority for advance ruling & department has not issued any clarification with regard to these issues. This issue required immediate attention of GST council.
Disclaimer: This article is only for educational purpose & cannot be used as legal advisory.