Applicability of RCM on Director Remuneration:
As per Entry 6 of Notification 13/2017 dated June 28, 2017 provides for RCM implications on the services rendered by the director of a company or body corporate to the said company or body corporate thereby creating an onus on the company to pay taxes under RCM on the said services supplied by directors. As per this entry director remuneration is liable to GST under RCM but there are some exceptions which are stated in Schedule III of CGST Act.
Schedule III of the CGST Act, deals with those areas which can be neither treated as supply of goods nor treated as supply of services.
“Services by employee to employer shall be regarded as neither supply of goods nor supply of services. However, service by employer to employee shall be a taxable service, which shall be covered by Schedule I-Entry 2 read with Valuation rules. Hence, providing cafeteria, recreation, sports facilities to employees will attract GST.”
Employee employer relationship is important in case of Directors; here are some notifications, circulars judgments of various authorities which established employee employer relationship between Director and Company.
Whole Time Director/Managing Director/Executive Director
Section 2(94) of the Companies Act, 2013 “whole-time director” includes a director in the whole-time employment of the company’
2018 ACR 927 CESTAT Kolkata in case of M/S. MAITHAN ALLOYS LTD
A whole-time director refers to a director who has been in employment of the company on a fulltime basis and is also entitled to receive remuneration. The position of a whole-time director is a position of significance under the Companies Act. Moreover, a whole-time director is considered and recognized as a ‘key managerial personnel’ under Section 2(51) of the Companies Act. Further, he is an officer in default [as defined in clause (60) of section 2] for any violation or non-compliance of the provisions of Companies Act. Thus, the whole time director is essentially an employee of the Company and accordingly, whatever remuneration is being paid in conformity with the provisions of the Companies Act, is pursuant to employer – employee relationship When the very provisions of the Companies Act makes whole time director (as also in capacity of key managerial personnel) responsible for any default / offences, it leads to the conclusion that those directors are employees of the assessee company.
General Circular No. 24/2012 dated 09.08.2012 issued by Ministry of Corporate Affairs confirms the fact that service tax is payable on the commission/sitting fees payable to the Non-Whole Time Directors of the company and the increase in the quantum of remuneration paid to them on account of service tax will not be considered for the purpose of approval of Central Government under section 309 and 310 of the Companies Act even if it exceeds the limit of 1% or 3% of the profit. This indicates that even the MCA, which is a part of government, believes that service tax is payable only on the sitting fees/commission payable to the directors and not on the salary paid to them during the course of employment.
Service Tax Circular no. 115/09/2009-ST dated 31.07.2009 issued by CBEC in positive list tax regime 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 are not liable to service tax.
M/s. Allied Blenders and Distillers (P.) Ltd. CESTAT Mumbai
The Hon’ble CESTAT of Mumbai Bench vide its Order No. A/88105 of 2018 dated June 25, 2018 stated that it is crystal clear that the Directors, who are concerned with the management of the company, were declared to all statutory authorities as employees of the company and complied with the provisions of the respective Acts, Rules and Regulations indicating the Director as an employee of the company. No contrary evidence has been brought on record by the revenue to show that the Directors, who were employees of the assessee, received amount which cannot be said as ‘salary’ but fees paid for being Director of the company. The Income Tax authorities also assessed the remuneration paid to the said Directors as salary
Recently Contrary AAR held
M/s Alcon Consulting Engineers (India) Pvt. Ltd. (GST AAR Karnataka)
RULING
- The amounts paid to the employees of the applicant company as reimbursement of expenses incurred by them in the course of employment of the applicant company are not liable to tax under the provisions of the Goods and Services Tax Act, 2017 as the transaction of the services supplied by a supplier to the employee and paid by the employee is liable to tax after 30.09.2019.
- The remuneration paid to the Director of the applicant company is liable to tax under reverse charge mechanism under sub-section (3) of section 9 in the hands of the applicant company as it is covered under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017.
M/s. In re Clay Crafts India Pvt. Ltd. (GST AAR Rajasthan)
RULING
- The consideration paid to the Directors by the applicant company will attract GST under reverse charge mechanism as it is covered under entry No. 6 of Notification No. 13/2017 Central Tax (Rate) dated 28.06.2017 issued under Section 9(3) of the CGST Act, 2017.
- Situation will remain same as (a) above and will attract GST under reverse charge mechanism.
Conclusion:
- So in above ruling, department is denying the employee employer relationship between director and Company.
- So we can conclude following points from earlier judgments and notifications :
- Generally, whole-time/managing/executive directors are under a contractual employment. That means if it is clearly mentioned in the board resolution of company that whole-time director will receive salary/bonus for services rendered by them, then in obvious case it will not be considered as service and hence question of taxability under RCM does not arise.
- In case of any other directors i.e., non-whole time director or non-executive directors or independent Director are not employees of the company and hence any kind of amount received by them as in remuneration, sitting fees, commission etc. will be chargeable to tax under RCM.
- If company is deducting TDS u/s 192 of Income Tax Act, 1962 for making salary payment to directors and issuing Form-16 to its director, then again no GST is required to be paid under RCM.
- As per the Maharashtra State Tax on Professions, trades, callings & Employment Act, 1975, every employer is required to deduct Professional Tax on the salary & wage amount paid to employee. Hence company bound to deduct PT & this is a very much clear proof for non-payment of GST on amount received by directors from company. It is a sufficient statutory evidence to prove the employer-employee relationship.
- If this is the case then every company has to take GST registration if they are paying any remuneration to its whole-time director/Executive Director/ Managing Director to discharge their liability. As per the section 24 of CGST Act 2017 there are certain cases when GST registration is required to be taken by the supplier of goods or services or both. In this section supplier has to get itself registered irrespective of the fact that it has aggregate turnover will cross threshold limit or not. “Persons who are required to pay tax under reverse charge”
- This will create havoc in business community as lower authority will take the benefits of these AAR to send the notice and it will create unnecessary litigation. In current scenario,businesses are struggling for their existence hence such AAR will create extra burden.
- Further AAR is applicable to those who sought for it hence one can feel safe until department address such issue.
Disclosure: The views taken in this document are for guidance only and cannot be taken or used as legal advisory.
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