ANALYSIS OF CLARIFICATION IN RESPECT OF LEVY OF GST ON DIRECTOR’S REMUNERATION PAID BY COMPANIES
♣ Ministry of Finance had vide Circular No: 140/10/2020 – GST, dated 10th June, 2020 clarified and cleared all ambiguities in respect of levy of GST on Director’s remuneration.
♣ Various doubts have been raised as to – whether the remuneration paid by companies to their directors falls under the ambit of entry in Schedule III of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act) i.e. “services by an employee to the employer in the course of or in relation to his employment” or whether the same are liable to be taxed in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017 (entry no.6).
♣ The issue of remuneration to directors has been examined under following two different categories:
> leviability of GST on remuneration paid by companies to the independent directors (IDs) defined in terms of Section 149(6) of the Companies Act, 2013 OR those directors who are not the employees of the said Company (Non-Executive Directors(“NEDs”) and;
> leviability of GST on remuneration paid by companies to the wholetime directors(WTDs) including Managing Director (MDs)who are employees of the said company.
|To the IDs OR NEDs
[not the employees of the said Company]
|To the WTDs or MDs,
[an employee of the said Company]
|IDs under section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it amply clear that such director, inter-alia, should not have been an employee or proprietor or a partner of the said company, in any of the 3 FY immediately preceding the FY in which he is proposed to be appointed in the said Company.||Section 2(94) of the Companies Act, 2013 is an inclusive definition, and thus WTD may be a person who is not an employee of the Company.
Once, it has been ascertained whether a director, irrespective of name and designation, is an employee, it would be pertinent to examine whether :
1. all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service”) or
2. is there any element of “contract for service”.
The issue has been deliberated by various courts and it has been held that:
a director who has also taken an employment in the company may be functioning in dual capacities, namely:
1. one as a director of the company and
2. the other on the basis of the contractual relationship of master and servant with the company, i.e. under a contract of service (employment) entered into with the company.
|It is also pertinent to note that similar identification (to that in Para above) and treatment of the Director’s remuneration is also present in the Income Tax Act, 1961 wherein the salaries paid to directors are subject to Tax Deducted at Source (‘TDS’) under Section 192 of the Income Tax Act, 1961 (‘IT Act’).
However, in cases where the remuneration is in the nature of professional fees and not salary, the same is liable for deduction under Section 194J of the IT Act.
|The services provided by above mentioned Directors to the Company, in lieu of remuneration as the consideration for the said services, are clearly outside the scope of Schedule III of the CGST Act i.e., Activities or Transactions which shall be treated neither as a Supply of Goods nor a Supply of Services and are therefore taxable.
However, in terms of entry at #Sl. No. 6 of the Table annexed to notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.
|the part of Director’s remuneration which are declared as “Salaries‟ in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.|
|It’s further clarified that the remuneration paid to such IDs, or those directors, by whatever name called, who are not employees of the said company, is taxable in hands of the Company, on reverse charge basis.||It is further clarified that the part of employee Director’s remuneration which is declared separately other than “salaries‟ in the Company’s accounts and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable.
Further, in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.
on categories of supply of services mentioned in column (2) of the Table of the aforesaid notification, supplied by a person as specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4) of the said Table.
♦ Thus, sitting fees paid to NEDs or IDs, shall be is taxable in hands of the Company, on reverse charge basis.
♦ Another, major issue is whether a Managing Director (preferably Promoter MD) should be considered as Employer or Employee for the purpose of this circular?
Whether or not a Managing Director is an employee of the Company apart from his being a Director can only be determined by the Articles of Association and terms of his employment in the form of Service Agreement or Contract of Employment defining his duties, obligations and future implications.
Where a Director holds a salaried employment in addition to his being a Director, he would in respect of such office or employment, be certainly an employee and entitled to claim the rights given to employees as such.
Also, the substantial power which vests with MD is granted to him only by Board of Directors / Members of the Company in Board Meeting or General Meeting respectively. And thus, had he be an employer, there would have been no need to grant him such crucial powers.
An important test to this question is what’s the source of income of MD i.e., is it salary or business income or professional fees. If its salary, needless to say, MD falls under the roof of employee of the Company.
The Principle of Separate Legal Existence is a fundamental principle in Company law. According to this principle, the Company is treated as an entity separate from its members and Directors. Hence neither Directors are held responsible in their personal capacity nor are their personal properties encroached except in few cases.
Last but not the least, Para 5.1 of the this circular also emphasises on the fact that “ a director who has taken an employment in the Company may be functioning in dual capacity namely as a Director and other on the basis of contractual relationship.”
Thus, as per my point of view, MD should be considered as an employee of the company and suitable treatment of GST be made.
Thus, to summarise:
Disclaimer- This article is not a professional advice. It’s just sharing of knowledge and my personal views for mutual discussion.