Recently the Advance Ruling Authority of Jaipur, Rajasthan has issued an Advance Ruling wherein the AAR has given the verdict that GST is applicable on Director’s Remuneration under Reverse Charge Mechanism and therefore, the Company which is paying the same, shall deposit the same to the exchequer. [ Ref AAR No. RAJ/AAR/2019-20/33 dated 20.02.2020, Applicant: M/s Clay Craft India Pvt Ltd.]. Similar ruling was also given by Advance Ruling Authority of Karnataka in the case of M/s Alcon Consulting Engineers (India) Pvt Ltd[ AR No. KAR ADRG 83/2019 dated 25.09.2019]. These two cases have raised the question amongst most of the business houses whether GST is payable on Remuneration paid to directors under Reverse Charge Mechanism. In this article I tried to highlight some points as per GST Laws and other important statutes from where we can draw a conclusion over the issue.
The Reverse Charge Mechanism on Director’s Remuneration is not a new concept in GST. The concept was borrowed from erstwhile Service Tax Laws. In Service Tax Regime Notification No. 30/2012-ST dated 20.06.2012 which specified certain transactions on which the Service Receiver must pay Tax and not the Service Provider. In the said notification clause (iv b) is reproduced below for ease of reference:
“(iv b) provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate”
Further, the definition of Service provided in Section 65B(44) of the Finance Act, 1994, as amended was as below:
“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-
(a) An activity which constitutes merely,-
(i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause 29(A) of article 366 of the Constitution; or
(iii) A transaction in money or actionable claim;
(b) A provision of service by an employee to the employer in the course of or in relation to his employment;
(c) Fees taken in any court or tribunal established under any law for the time being in force.”
From the definition of Service, it is clear that the provision of service is not applicable for service provided by employees to their employer as responsibility towards their employment. However, the notification no. 30/2012 has made the reverse charge mechanism for all directors and not to a class of director. Further, the service tax law did not specify class of directors who shall be considered as employee of the company.
In the said notification, no where it is specified that on how much value tax was going to be paid. It was also not specified whether all directors are covered under this notification or only a limited class of directors are covered.
In this respect, a reference can be taken of the General Circular No. 24/2012 dated 09.08.2012 issued by the Ministry of Corporate Affairs. This Circular primarily deals with Managerial Remuneration but an important inference can be drawn from the said circular. The said circular is quoted below for reference:
“The Finance Act 2012 has introduced Service Tax which is applicable to anyone who provides a Service not covered under the negative/exempted list and if the value of annual revenue is more than Rs.10 lakh. The Non-Whole Time Directors of the Company are presently not covered under the exempted list and as such, the sitting fee/commission payable to them by the company is liable to Service Tax.(emphasis applied)
If such Service Tax is paid by the company, it will be deemed to be a part of remuneration under section 198 of the Act and would accordingly increase the remuneration amount of such Non-Whole Time Directors. This remuneration could then exceed the limit of 1% profit [u/s 309(4)] of the company when the company has a Managing/Whole Time Directors/Managers or. 3% of the profit [u/s 309(4)] of the company if the company does not have a Managing/Whole Time Directors/Managers, as the case may be. As per existing provisions of the Companies Act, 1956, this would require prior approval of Central Government u/s 309 and 310 of the Act.
It has now been decided that any increase in remuneration of Non-Whole Time Director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under section 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit [u/s 309(4)] of the company, as the case may be, in the financial year 2012-13.”
From the aforesaid Circular it can be inferred that the Ministry of Corporate Affairs which is also part of the Central Government is also under the view that Service Tax is applicable only in respect of Non Whole Time Directors and Remuneration paid to Whole Time Director and Managing director are exempt or under Negative List.
Further inference can be made from the General Circular No. 115/09/2009-ST dated 31.07.2009 issued by the CBEC in Pre-Negative Regime of Service Tax wherein it was clarified that remunerations paid to Managing Director / Directors of companies whether whole-time or independent when being compensated for their performance as Managing Director/Directors would not be liable to service tax. This indicates that amounts paid in relation to employment is not leviable to service tax.
Considering the above, it can be concluded that Service Tax was only applicable in respect of sitting fees/commission paid to directors. Remuneration/Salary drawn by directors for giving full time effort to run the company is outside the scope of Service Tax.
Classification of Directors as per the Companies Act, 2013
Companies Act, 2013 gives much clarity in regard to the definition of various classes of Directors which was not there in the erstwhile Companies Act, 1956. Let us examine what is the definition of Executive Director as per Companies Act, 2013. As per Rule 2(1)(k) of the Companies( Specification of Definition Details) Rules, 2014 Executive Director means Whole Time Director as defined in Section 2(94) of the Companies Act, 2013.
As per Section 2(94)of the Companies Act, 2013, Whole Time Director includes a director in Whole Time Employment in the Company. Therefore, to become a Whole Time Director, both the conditions need to be fulfilled, 1. The person shall be a director and 2. He shall be whole time employee of the company. Further, if a person is a Whole Time Director of the Company then he shall be called Executive Director of the Company.
Further, as per Section 2(54) of the Companies Act, 2013,
“managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.
Explanation.—For the purposes of this clause, the power to do administrative acts of a routine nature when so authorised by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within the substantial powers of management”
Therefore, a Managing Director shall necessarily be a director first. As Managing Director is entrusted with substantial power of the management of company by the Board of Director to manage the daily affairs of the Company, therefore, it is implied that he/she should necessarily be a Whole Time Director of the Company.
From the above, we can reach to logical conclusion that Managing Director is a Whole Time Director. On the other hand the definition of Non-Executive Director is not provided in the companies act. A director who is not an executive director/whole time director can be called a Non-Executive Director.
Position in GST Law
Like Service Tax Laws, similar provisions have been enacted in the GST Laws also. Section 9(3) of the CGST Act, 2017 empowers the Central Government to notify certain goods and services on which GST shall be paid by the Receiver of Goods and/or Services under Reverse Charge Basis. Similar provision is also there in IGST Act, 2017 and respective State GST And UTGST Acts. Based upon the same Notification No. 13/2017-Central Tax(Rate) dated 28.06.2017 has been notified. In Sl.No. 6 of the said notification the following has been prescribed:
|Sl. No.||Category of Supply of Service||Supplier of Service||Recipient of Service|
|6.||Services supplied by a director of a company or a body corporate to the said company or the body corporate.||A director of a company or a body corporate.||The company or a body corporate located in the taxable territory.|
Therefore, as per the aforesaid Notification if any is Service Supplied by Director to the Company then the entire Tax liability is to be discharged by the Company. Further, Schedule III, clause I of the CGST Act, 2017 [ with corresponding provisions in other GST Laws], “Service by an employee to the employer in the course of or in relation to his employment” is neither Supply of Goods nor Supply of Services.
Therefore, from conjoint reading of the Notification 13/2017-Central Tax (Rate) with Section 9(3) of the CGST Act, 2017 and clause I of Schedule III, the following can be enumerated:
> If the Director is an employee of the company, then no GST shall be paid under RCM by the Company since the Service Provided by the Employee to Employer in the course of employment is neither Goods nor Service.
> However, if the director is not an employee of the company, then GST is payable under Reverse Charge Mechanism by the Company.
So, the important question to be determined here is whether a director is an employee of the company or not.
In this respect we can refer to the companies act, 2013 for different class of directors and determine whether the director is an employee or not.
Whole Time Director/Executive Director
As referred above, a whole time director is a director who is in whole time employment in the company. Therefore, Whole Time Director is essentially be an Employee of the Company. As per Section 190 of the Companies Act, 2013, a Company shall keep the contract of Employment with the Whole Time Director in the registered office of the company and it shall be open for inspection by every members with a payment of fee. Monthly remuneration (Salary, Allowances and Others) received by the Whole Time Director is taxable under the head Income from Salaries as per the Income Tax Act, 1961 and the Company is liable to deduct TDS u/s 192 on the same. The appointment of WTD shall be made by the Board of Directors and Resolution passed by the Shareholders.
As per the Companies Act, a Managing Director is a Director who has been appointed by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company. Managing director also includes any person occupying the position of Managing Director, by whatever name called.
Therefore, Managing Director shall first be a Director and his responsibility is to manage the daily affairs of the company. Therefore, necessarily a Managing Director should be a Whole Time Director. However, Section 203 of the Companies Act, 2013 empowers a person to become Managing Director in more than one Company but that is with the approval of the Board of Directors of the First Company. Therefore, in normal circumstances, Managing Director is a whole time director and therefore, shall be treated as employee of the company.
Non Executive Director/Independent Director.
Even though these persons are Director of the Company, but they cannot be termed employee of the company. Any remuneration drawn by them shall be taxable under section 194J of the Income Tax Act, 1961 as Professional/Technical Services.
From the above discussion we can conclude that GST on Director’s Remuneration is applicable upon the company if Remuneration Consists of Fees/Commission paid to Non Executive/Independent Directors. Remuneration Paid to Whole Time/ Executive/Managing Directors are covered under Salary as Employer-Employee relationship exists in those cases. Therefore, remuneration paid to Managing Director/Whole Time Director are not taxable in GST under reverse charge mechanism.
From the above discussion it is clear that the position of law in both pre-GST and Post-GST regime does not change in respect of taxability of Director’s Remuneration under Reverse Charge Mechanism. As both erstwhile Finance Act as well as the GST Acts do not describe the provision clearly thereby creating confusion in every respect. There should have been some logical interpretation of the Statute keeping in mind all the applicable laws in mind specially the Companies Act under which a Company is established. Further, the judgements of the Advance Ruling Authority cannot change the position of law. It can be a guiding factor but not the ultimatum. Further, the Order given by the Advance Ruling Authority can very well be challenged in higher forum by the person against whom the order has been given. Furthermore, the order of the Advance Ruling authority is only applicable on the person who has applied for the ruling and not on any other person.