GST on Remuneration paid to Non-Executive Directors and Implications on Registration-Karnataka AAR

This Article is based on recent AAR from Karnataka on 4th May 2020. Where it is ruled that remuneration paid to non-executive directors is taxable under RCM. AAR helps in identifying the nature of income which is taxable or exempt or no supply for the purpose of including in aggregate turnover for mandatory registration.

As per GST registration provisions, every person whose aggregate turnover exceeds 20 Lakhs in a financial year shall be registered himself under GST provisions. The definition of aggregate turnover includes taxable and exempt supplies.

GST registration provisions becomes relevant and applicable to Non-executive directors who are drawing remuneration. Since Non-executive directors are not employees, any service provided to the organization by them are taxable under GST.

Under GST, transactions are broadly divided in to Exempt and Taxable. Requirement of registration is based on the type of supply, which is simplified in the below table.

Constituents of Aggregate Turnover/supply Registration requirement
Only Taxable Supply Yes
Only Exempt Supply No
Both Taxable and Exempt Yes

Hence even if remuneration received by a Non-executive director is less than 20 lakh, still any other income which may be exempt (interest/rental etc.) in the nature shall be considered for quantifying the aggregate turnover for GST registration.

Below are the various nature of incomes, classified in to exempt/taxable which forms part of aggregate turnover for the purpose of GST registration.

Sl No. Various nature of Income Type of Supply-Exempt / Taxable/ Not a supply To be considered for Aggregate Turnover for registaration Value of service to be considered for Aggregate Turnover
a(i) Partners salary as partner from a partnership firm Not a supply No Nil
a(ii) Partners share of profit from a partnership firm Not a supply No Nil
b(i) Salary as Executive Director from company Not a supply No Nil
b(ii) Salary as Non-executive Director from company Taxable-(RCM) Yes Remuneration received
c Interest Income on partners fixed capital credited to partners’ capital account Exempt Yes Amount of deposits / loan / advances extended.
d Interest Income on partners variable capital credited to partners’ capital account Exempt Yes Amount of deposits / loan / advances extended.
e Interest received on Loans given Exempt Yes Amount of deposits / loan / advances extended.
f Interest received on advance given Exempt Yes Amount of deposits / loan / advances extended.
g Interest income accumulated along with deposit/fixed deposit Exempt Yes Amount of deposits / loan / advances extended.
h Interest income received with deposit/fixed deposit Exempt Yes Amount of deposits / loan / advances extended.
i Interest received on Debentures Exempt Yes Amount of deposits / loan / advances extended.
j Interest accumulated on Debentures Exempt Yes Amount of deposits / loan / advances extended.
k Interest on Post office deposits Exempt Yes Amount of deposits / loan / advances extended.
l Interest income on NSC Exempt Yes Amount of deposits / loan / advances extended.
m Interest income credited on PF account Exempt Yes Amount of deposits / loan / advances extended.
n Accumulated interest (along with principal) received on closure of PF account Exempt Yes Amount of deposits / loan / advances extended.
o Interest income on PPF Exempt Yes Amount of deposits / loan / advances extended.
p Interest income credited on NPS account Exempt Yes Amount of deposits / loan / advances extended.
q Receipt of Maturity proceeds of life insurance policies Not a supply No Nil
r Dividend on Shares Not a supply No Nil
s Rent on commercial properties Taxable Yes Rental received
t Residential Rents Exempt Yes Rental received
u capital gain/loss of shares Not a supply No Nil

Compliance under GST, once aggregate turnover exceeds INR 20 Lakh:

> Registration

> Raising tax invoices

> Payment of GST collected

> Filing of applicable GST returns periodically etc.

Penalty for Not obtaining registration under GST:  10,000 or amount of tax evaded, whichever is higher.

Author Bio

Qualification: CA in Job / Business
Company: AB Mauri India Pvt Ltd
Location: Bengaluru, Karnataka, IN
Member Since: 19 Mar 2019 | Total Posts: 1

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