GST on Director’s Remuneration. Employee or Director or Both. Attempted to Frame 8 Issues. Resolve It
Recently, the Ld. Rajasthan Authority for Advance Ruling in the matter of Clay Craft India Private Limited and Ld. Karnataka Authority for Advance Ruling in the matter of Alcon Consulting Engineers (India) Private Limited have given the ruling that Director is not the employee of the Company, and accordingly, the GST is payable in respect of the payment made by the company, under any head, to its director. Authority for Advance Ruling has not considered that the director may also act as an employee director of the company. It has also not considered that the director, in addition to a director, may also act as employee and may also provide the services to the company as employee to the company in the course of or in relation to his employment. Authority has also held that the services provided by the director to the company are falling under section 9 read with Notification 13/2017 – CT (R) dated 28-06-2017 vide entry No. 6, and accordingly, the GST, in case of services provided by the Director of the company to such company, shall be payable on reverse charge mechanism basis.
It is important to note here that as per section 103 of the GST Act, the advance ruling is binding only on the applicant who has sought the advance ruling and the concerned officer in respect of the applicant who sought such advance ruling. Accordingly, any advance ruling given by the authority for advance ruling is not binding on THIRD PARTY. Needless to say, though these rulings are not binding on third party, GST authority may, guided by the aforesaid rulings, start issuing notices against the Companies for not paying GST amount against the payment made to the Director.
Accordingly, the aforesaid rulings have raised various unanswered queries and confusion among the business persons and professionals, and the sense of uncertainty cannot be ignored. We have seen in the Past that that financial markets, private investment and overall economic activity were negatively impacted by heightened uncertainty. Accordingly, I have tried to frame following issues in respect of same:
1. Whether GST is payable in respect of the consideration received against all the services provided by the director to the company?
2. Whether the director is an employee of the company?
3. If the director is not the employee of the company, whether the designation of director will debar him (director) to have a separate relationship with the company as its employee under a contract of service?
4. Whether GST is payable in respect of the consideration received against any of services provided by the director to the company?
5. Whether the threshold limit as prescribed under section 22 of GST Act is applicable for the payment of GST against the remuneration paid to the director in respect of the services provided by the director to the company?
6. Whether a company having a turnover below the threshold limit and making the payment of remuneration to its director is required to be registered under the GST Act?
7. Whether a director receiving remuneration is required to be registered under the GST Act?
8. If the GST is payable in respect of the amount received against the services provided by the director to the company, whether the TDS, against the amount paid to director, is required to be deducted under section 192 of the Income Tax Act, 1961 or 194J (1)(ba) of the Income Tax Act, 1961?
The Central Goods and Services Tax Act, 2017 is an act to make a provision for levy and collection of tax on intra-state supply of goods or services or both by the Central Government and for matters connected therewith or incidental thereto. Similarly, each states have their own respective Goods and Services Tax Act to make a provision for levy and collection of tax on intra-state supply of goods or services or both by the concerned state government and for matters connected therewith or incidental thereto. As the provisions of all these acts are almost similar, these acts, for the sake of reference, are hereinafter jointly referred as GST Act.
ISSUE NO. 1:
Section 7 read with Schedule-III of the GST Act provides that any services provided by an employee to the employer in the course of or in relation to his employment shall not be treated as supply of services under the GST Act. Accordingly, the Goods and Services Tax (hereinafter referred as “GST”) is exempted under the GST Act in respect of the services provided by an employee to the employer in the course of or in relation to his employment.
Therefore, if the director is acting as an employee of the company for the company under the valid contract/terms/appointment document and providing its services to the company in terms of its appointment document, the services provided by the director to the company should be treated as services provided by the employee to employer under his employment. Therefore, any payment made by the company to director for providing such services in terms of his employment should be exempted, in terms of section 7 read with Schedule III of GST Act, from GST liability.
Further, section 9 read with Notification 13/2017 – CT (R) dated 28-06-2017 vide entry No. 6 provides that the GST in respect of the services provided by the Director of the company or body corporate to such company or body corporate, shall be payable on reverse charge basis.
As the words “any” or “all” are not used in aforesaid entry No. 6 of Notification 13/2017 – CT (R) dated 28-06-2017, it is crystal clear that every services provided by director to the company cannot be said to be liable for GST under GST Act. Therefore, the GST Act itself has given a scope to consider the services provided by the director to the company in more than one part. Accordingly, it may be divided into two parts, one, where the services provided by the director to the company as employee to employer in terms of his employment with company, and secondly, the other services, in terms of the Companies Act, 2013, provided by the person in the capacity of director to the company, and thereby he may receive the fee for same as professional fee, consultant fee, sitting fee, etc. This is pertinent to mention here that Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that a company may pay a sitting fee to a director for attending meetings of the Board or committees thereof, such sum as may be decided by the Board of directors thereof which shall not exceed one lakh rupees per meeting of the Board or committee thereof, and this may be considered as payment to the director by the company for providing the services to the company in the capacity of director. Accordingly, we can’t rely on entry No. 6 of Notification 13/2017 – CT (R) dated 28-06-2017 to hold that every services provided by the director are liable for GST payment. Therefore, GST should NOT be applicable in respect of all kind of services provided by the director to the company. The Issue No. 1 is answered accordingly.
ISSUE NO. 2:
The GST Act has neither defined the term “Employee” nor defined the term “Director”. However, there may not be any dispute in referring the provisions of the Companies Act, 2013 and rules made there under to get the definition of Director, and similarly, Labour Laws to get the definition of Employee.
As per Section 2(34) of the Companies Act, 2013, a director means a director appointed to the Board of a Company, and as per section 2(10) of the Companies Act, 2013, collective body of the directors of the Company is called as “Board of Directors” or Body” in relation to the Company. As per section 165 of the Companies Act, 2013, a person can hold the directorship upto 20 companies. The specific duties of directors are enumerated in section 166 of the Companies Act, 2013. The Companies Act, 2013 recognizes various kinds of director, like executive, non-executive, additional, independent, nominee, etc. Section 179 of the Companies Act, 2013 provides the provisions related to the Powers of Board and section 180 of the Companies Act, 2013 provides the provisions related to the restrictions on powers of Board. However, no such provisions related to individual director are there in the Companies Act. Needless to say, in case of company, the ultimate direction and control of the affairs resided with the board of directors, if not with the shareholders. Accordingly, a director cannot be deemed as a person having ultimate direction and control of the affairs of the company.
Further, as per section 2(1)(k) of the Companies (Specification of Definition Details) Rules, 2014, Executive Director means a whole time director as defined under clause (94) of section 2 of Companies Act, 2013. Further, as per section 2(94) of the Companies Act, 2013, whole-time director includes as director in the whole-time employment of the company.
Further, Section 17(2)(iii)(a) of Income Tax Act, 1961 provides that perquisites includes the value of any benefit or amenity granted or provided free of cost or at concessional rate by a company to an employee who is a director thereof.
Further, Explanation (a)(i) of sub section (1) of section 188 of the Companies Act, 2013 provides that where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise.
Section 2(f) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 provides that “employee” means any person who is employed for wages in any kind of work, manual or otherwise, in or in connection with the work of an establishment and who gets his wages directly or indirectly from the employer. Similarly, as per Section 2 (9) of the Employees’ State Insurance Act, 1948, “employee” means any person employed for wages in or in connection with the work of a factory or establishment, subject to the condition, to which the Act applies. Further, as per Cambridge dictionary, the word “employee” means “someone who is paid to work for someone else”.
In view of above, the director can also be in employment of the company, director can also work as employee of the company, and the director can also get salary from the company. There is no restriction to hold that the director is also an employee of the company. Therefore, issue No. 2 is answered accordingly. Therefore, GST should not be applicable in case of those directors, who are receiving the payment from the company as salary for providing their services to the company as employee under the terms of their appointment in relation to their employment. In that case TDS should be deducted by the company under section 192 of the Income Tax Act, 1962. However, in view of aforesaid recent rulings of AAR, even if those rulings are not binding on third parties, GST authority may issue notice against the company, guided by the aforesaid rulings, for not paying the GST on said payment. Therefore, it is advisable to file an application before the concerned Ld. Authority for Advance Ruling to get, company wise, specific clarifications in respect of same to avoid future, unnecessary, litigation.
ISSUE NO. 3:
Even assuming, though denying, that the director is not an employee of the company, whether the designation of director will debar him (director) to have a separate relationship with the company as its employee under a contract of service?
The Hon’ble Supreme Court in the matter of Ram Pershad vs Commissioner Of Income-Tax, New … on 24 August, 1972 has held that “the Managing Director may have a dual capacity. He may both be a Director as well as employee. It is therefore evident that in the capacity of a managing- director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee or an agent depending upon the nature of his work and the terms of his employment”.
The Hon’ble Supreme Court of India in the matter of M/S Comed Chemicals Ltd Vs. C.N. Ramchand on 6 November, 2008 has held that “from settled legal position as also from the functions to be performed by the respondent, I hold that the respondent was working in dual or double capacity, i.e. (i) as an employee, and (ii) as a Director”.
In view of above, it is not the position/designation but the terms and condition of his employment and nature of his work which should be the criteria to decide whether the concerned person is in employment of the company. Further, on person at a same time can appointed as director as well as employee of the company.
Further, section 188(1)(f) of the Companies Act, 2013 provides that the company, subject to the condition as mentioned therein, can enter into any contract or arrangement with a related party with respect to such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company. This is apposite to mention here that section 2(76) of the Companies Act, 2013 provides that related party means a director or his relative. Further, Explanation (a)(i) of sub section (1) of section 188 of the Companies Act, 2013 provides that where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise. Therefore, the Companies Act, 2013 itself has recognized a director as also an employee of the company, and accordingly, a director can be appointed as employee of the company by the company, and the company may pay salary for same. In that case TDS should be deducted by the company under section 192 of the Income Tax Act, 1961.
Further, in that case, the company is required to pass the Board Resolution or Resolution, as the case may be, in accordance to section 188 of the Companies Act, 2013 read with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014. The registers of contracts or arrangements in which directors are interested are required to be maintained under section 189 of the Companies Act, 2013 read with Rule 16 of the Companies (Meetings of Board and its Powers) Rules, 2014. The director is required to make the disclosure of interest in terms of section 184 of the Companies Act, 2013. The committee, if applicable, is required to be formed in terms of section 178 of the Companies Act, 2013. Further, it should be recorded in the Board Report in terms of section 134(3)(e), if applicable, and 134(3)(h) of the Companies Act, 2013.
Issue No. 3 is answered accordingly.
ISSUE NO. 4:
Further, section 9 read with Notification 13/2017 – CT (R) dated 28-06-2017 vide entry No. 6 provides that the GST in respect of the services provided by the Director of the company or body corporate to such company or body corporate, shall be payable on reverse charge basis. Accordingly, the services, other than the services provided by the director as employee of the company, provided by the director to the company are liable for GST payment on the amount paid by the company to such director. Therefore, the GST is applicable in respect of all the payment received by the director, except the payment received by him as employee of the company in terms of his employment, from the company. The company, in that case, should deduct the TDS under section 194J (1) (ba) of the Income Tax Act, 1961. Therefore, the issue no. 4 is answered accordingly.
ISSUE NO. 5:
Further, Section 22 of the GST Act provides that every supplier is liable to be registered under the GST Act if his aggregate turnover in a financial year, subject to the condition, exceeds twenty lakh rupees. However, section 24 (iii) of the GST Act provides that notwithstanding anything contained in section 22 of the GST Act, any person who is required to pay tax under reverse charge is required to be registered under the GST Act. Accordingly, threshold limit is not applicable in case of transactions, wherein reverse charge mechanism is applicable for the payment of GST.
Therefore, in terms of Section 9 of the GST Act read with entry no. 6 of Notification 13/2017 – CT (R) dated 28-06-2017 and 24(iii) of the GST Act, the threshold limit as prescribed under section 22 is NOT applicable for the payment of GST against the remuneration paid to the director in respect of the services provided by the director to the company. Therefore, the issue no. 5 is answered accordingly.
ISSUE NO. 6:
In terms of Section 9 of the GST Act read with entry no. 6 of Notification 13/2017 – CT (R) dated 28-06-2017 and Section 24(iii) of the GST Act, the threshold limit as prescribed under section 22 is NOT applicable for the payment of GST against the remuneration paid to the director in respect of the services provided by the director to the company. Accordingly, the company having a turnover below the threshold limit and making the payment of remuneration to its director, except for the services provided by the director to the company as employee of company in relation to his employment, is required to be registered under the GST Act. Therefore, the issue no. 6 is answered accordingly.
ISSUE NO. 7:
That in terms of section 9 read with entry no. 6 of Notification 13/2017 – CT (R) dated 28-06-2017, the GST is payable under reverse charge mechanism in respect of the services provided by the Director to the Company. As the GST is payable under the reverse charge mechanism, it will be the responsibility and liability of the company to pay GST in respect of same, and therefore, the Director is NOT required to be registered under the GST Act for the same. Therefore, the issue no. 7 is answered accordingly.
ISSUE NO. 8:
The TDS in respect of the consideration amount paid for the services, except the services provided by the director as employee of the company in relation to his employment, provided by director to the company should be deducted under section 194J (1)(ba) of the Income Tax Act, 1961. However, the TDS in respect consideration paid for the services provided by the director to the company as employee of the company in relation to his employment should be deducted under section 192 of the Income Tax Act, 1961.
In view of above, the stands taken by the Ld. Authorities in the aforesaid rulings may require review in the matter. Accordingly, the GST Authority should come up with clarification in respect of same so that the aforesaid issues will be resolved permanently.
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Is there any specific provision in GST Act, wherein buyer may be compelled to pay the GST amount when the supplier fails to deposit the collected GST amount within the period of three months.