GST on Director’s Remuneration – To Levy or Not?

There has been a lot of confusion on taxability of director’s remuneration from companies in which they are directors in different forms. The confusion or doubts got mounted in the wake of recent conflicting advance rulings.

CBIC has now come out with a detailed Circular No. 140/10/2020-GST dated 10.06.2020 which clarifies issues relating to taxability of director’s remuneration including salary.

This Circular examines following two situations in relation to directors remuneration:

a) leviability of GST on remuneration paid by companies to the independent directors defined in terms of section 149(6) of the Companies Act, 2013 or those directors who are not the employees of the said company.

b) leviability of GST on remuneration paid by companies to the whole-time directors including managing director who are employees of the said company.

Based on clarification, the following position emerges :

The companies need to understand the difference between kind of directors. In the board, all directors are equal but for taxation under GST, one needs to understand whether the director is employee of the company or otherwise.

The following points are worth noting :

• Managing director / whole-time directors / executive directors are employees of company if they get salary and allowances from such company.
• Independent / non-executive / nominee directors are not employees of company and as such don’t get salary but are remunerated in other forms such as sitting fees, commission etc.
• Both types of directors can not be equated for the purpose of GST.
• In terms of section 7 read alongwith Schedule III of CGST Act, 2017, services by employee to employer in the course of or in relating to his employment are excluded. As such, services by such directors who are considered as employees are not a supply and hence not taxable. There is no question of levy of GST on such services and as such reverse charge also does not apply.
• One acid test for such cases can be that TDS is deducted u/s 192 of the Income Tax Act, 1961 (i.e. salary).
• In case of directors other than whole time directors (i.e., independent, non-executive, nominee etc.), since they are not in whole time employment, they do not earn salary but get rewarded in some other form which could be sitting fees, bonus, commission, percentage of net profit etc.
• In case of such non-whole time directors, they are not ‘employees’ or in whole time employment by any interpretation and hence their services does not fall under exclusion vide Schedule III of CGST Act.
• Being taxable, such services of directors shall be subject to levy of GST but in such cases, Notification No. 13/2017-CT (Rate) dated 28.06.2017 comes into play which provides for discharge of GST liability under reverse charge mechanism i.e., by the company.
• Such director’s remuneration is also subject to TDS but under section 194J of the Income Tax Act, 1961 (i.e., professional services)
• For other services rendered by whole-time directors which are otherwise taxable, GST shall be levied and discharged under reverse charge mechanism.

Though the CBIC Circular clarifies that services provided by whole-time directors to the company which are not in the capacity as an employee shall be out side the scope of exclusion and be taxable, such GST shall be payable under reverse charge mechanism by the company. This would imply that all services provided by ‘employee directors’ to company which are not in the course of employment will the subject to levy of GST and tax be discharged by the company under reverse charge.

On this issue, there could be conflicting interpretation as what is taxable is supply per se and not the person who is supplying. For example, if a director provides services of renting a property, tax on such service is under renting of immovable property and not as director’s services. Confusion still persists as to whether ‘any’ or ‘all’ services provided by directors are under reverse charge or only the services provided in the capacity as a director.

It would be advisable for companies to document the transaction between directors as employee and director as non-executive director elaborately so that no dispute arises and the tax payers are saved from harassment.