An Order of Rajasthan Authority for Advance Ruling (AAR) in case of M/s CLAY CRAFT INDIA PVT. LTD. (JAIPUR)(Order No. RAJ/AAR/2019-20/33 date 20th Feb,20) held that remuneration payable by company to its directors is taxable and attract GST under reverse charge.

This order has left all the company taxpayer in dilemma whether to pay GST @18% on remuneration to directors or not? There are many small companies registered under GST Act and in most of these company, remuneration/salary is being paid to directors on regular basis. In such company there are limited numbers of directors who are active in day to day business operations.

Similar kind of case is there of M/s Alcon Consulting Engineering (I) Pvt Ltd (Karnataka), Order No.KAR ADRG 83/2019 DATE 25-09.2019 and Karnataka AAR held that GST under RCM to be paid on remuneration paid to directors.

Let’s analyse and understand relevant aspect of this case and provisions of GST Act and come to the conclusion.

Provision of Reverse Charge Mechanism (RCM) and Service Provided by Directors :

–  An Authority (RAJ. AAR) is in opinion that notification no. 13/2017(Central Tax rate) dated 28.06.2017 has given the specific entry (No.6) for GST to be paid on services by recipient under RCM. Hence, consideration paid to director by applicant company will attract GST under RCM.

–  This notification issued under section 9(3) of CGST Act,2017. Such entry is as below;

S.No. Category of Supply of Service Supplier of Service Recipient of Service
6 Service supplied by director of a company or a body corporate to the said company or a body corporate A director of a company or a body corporate The company or a body corporate

–  Section 9 of GST Act : It contains provision of RCM in respect of services with are notified time to time. It states that GST will be attract on activity which must be supply of goods or services, subject to some exemption. Once an activity is neither supply of goods nor supply of services, no GST will be levied on such activity.

Services in relation to employment is not supply of services :

–  Schedule III of CGST Act,2017 provides the list of certain transaction which are neither considered as supply of goods nor supply of services. Entry No.1 of Schedule III states that the services by an employee to the employer in the course of or in relation to his employment.

–  Section 7 provides the activities or transactions specified in schedule -III would be treated neither as a supply of goods nor a supply of services. Hence such services do not fall under definition of “Supply”.

–  In the said case, an authority (RAJ AAR) in is opinion that the director is not an employee of a company hence, it does not fall under entry no.1 of schedule III of CGST Act. But the terms of employee and employer are not defined under GST Act and hence the same must be understood with aid of other laws.

Is Director an employee of a company? – (Analysis of Company Act, IT Act and Excise and Service Tax Act) :

–  As per Company Act, 2013 – All the directors whether whole-time director or managing director but not independent director, considered as employee of company.

–  As per Income Tax Act, 1961 – Section 192 of IT Act. is applicable only where there is a relation of employee and employer. Hence, If a company paying consideration to its directors who are responsible managerial function of company and deducting TDS under section 192 of IT Act, 1961, then director will be considered as employee of a company.  

– Excise and Service Tax Act – Under the old indirect tax regime, there are many decisions or judgement held by tribunals like in below cases, stating consideration paid to director would be treated as salary as much as there would be employer-employee relationship and service tax cannot be levied.

    • M/s Maithan s Alloys Ltd vs. Commissioner of Central Excise and Service Tax, Bolpur in 22nd April 2019
    • Brahm Alloy Limited vs Commissioner of CGST & C. Ex., Durgapur 2019 (Tri. Kalkata)
    • Allied Blenders and Distillers Pvt Ltd Vs. CCE & ST Aurangabad 2019 (Tri. Mumbai)

–  Hence, it is clear that there is employee-employer relationship between director and its company. Service provided for employment does not treated as supply of service of goods or supply of services (Schedule- III and Sec.7) and thus, no GST will attract on such transaction.

Some Important points to be considered :

– We need to consider all the aspect of Advance Ruling and aforesaid judgements. Such as ;

    • There is employment contract/agreement/AOA entered between company and director which contains rules, responsibility and other terms of employment.
    • There is regular payment of remuneration to director.
    • Appropriate treatment under IT Act and other laws like, PF, PT, ESIC etc.

–  Services is provided by directors other than in employment like sitting fees, professional services, technical services, would attract GST under RCM.(Section 9(3)).

–  Payment made to independent director, non-executive director or Nominee Director for the services would also attract GST.

Conclusion :

As per section 103 of CGST Act, the order of the Advance Ruling is only binding on the applicant and the jurisdictional officer in respect of the applicant. It is not applicable to similarly placed other taxable person. It is clear that AAR did not consider all the relevant aspect of the case before arriving at the final decision. The applicant can file an appeal before the appellate authority of advance ruling.

Hence, No need to pay GST on remuneration paid to director with respect to his employment as much as it related to employer-employee relationship and duly supported by employment contract or agreement.

However, GST council must clarify the issue of GST under reverse charge vide entry no. 6 of noti. 13/2017 dated 28.06.2017 so that taxpayers can take a relief.

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