Recently, Rajasthan Authority for Advance Ruling in case of M/s. Clay Craft India P. Ltd. has held that GST is leviable under reverse charge mechanism on Salary paid to Directors. In its decision pronounced on 20.02.2020 it has held that notification no. 13/2017 dated 28.06.2017 has given distinct identity to the service provided by the Director and specifically included in the category of services in which the GST will be payable under RCM.

In this write-up let us examine “Whether GST is payable under reverse charge mechanism on remuneration payable to director.

  • Directors have not been defined under the GST Act. However, the same has been defined under the Companies Act. Directors can be classified as Executive Director & Non – Executive Directors. As per Companies Act, “Executive Directors” means Whole Time Director. S. 2(94) of the Companies Act, 2013 defines “Whole Time Director” as director in the whole-time employment of the Company. Thus, Executive Directors are directors who are whole time employee of the Company. 
  • 2(78) of the Companies Act, 2013 defines remuneration as “any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under Income Tax Act, 1961. Further, S. 197(4) of the Companies Act, 2013 states that remuneration shall be inclusive of remuneration payable to him for service rendered in any other capacity. However, the same shall not include remuneration payable for services rendered of professional nature & Sitting Fees.
  • Generally, Remuneration is used in broader connotation to include not only basic pay but also commission, bonus, incentive such as stock options, etc and can be fixed or variable or both.
  • Remuneration received by the whole-time directors are assessed under the head “Income from Salary” and not as “Income from Professional Fees”. Even Companies deduct TDS u/s. 192 of the Income Tax Act on remuneration paid to whole time directors.
  • According to schedule III of the CGST Act service provided by employee to employer in the course of or in relation to his employment will not be considered as supply of goods or services.
  • Ministry of Corporate Affairs in its general circular no. 24/2012 has clarified that sitting fees and commission paid to Non-Whole Time Directors, as the same being not covered under the negative/exempted list, service tax is payable on same.

Based on the aforesaid, what can be derived is:

  • Executive Directors, Managing Director, Whole Time Directors being in whole time employment of the Company are employee of the Company. Whereas, non–executive directors are not the employee of the Company.
  • Any services provided by Executive Directors within the scope of employment will be covered under schedule III i.e. service provided by employee to employer in the course of or in relation to his employment will not be considered as supply of goods or services.
  • Apart from services covered in scope of employment, any other services i.e. of professional nature and sitting fees will paid to executive directors will be chargeable to GST under reverse charge mechanism.
  • Any payment made to non-executive directors will be chargeable to GST under reverse charge mechanism.

 CESTAT, Kolkata in case of Maithan Alloys V. CCE & ST, Bolpur pronounced on 22.04.2019, in issue before it “whether remuneration paid to whole time directors would constitute ‘service’ liable to service tax in the hands of the assessee under reverse charge mechanism, has held that the whole time director is essentially an employee of the Company, demand of service tax on remuneration paid to whole time directors cannot be sustained and hence set aside

Also, CESTAT, Mumbai in case of M/s. Allied Blenders and Distillers (P.) Ltd. has held that 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. Thus, setting aside the order of the adjudication authority, charging service tax on remuneration paid to Director

In the case before Rajasthan Authority for advance ruling, AAR has made no effort to distinguish between executive directors and non -executive directors. Further, Company M/s Clay Craft India P. Ltd. in addition to remuneration was also paying commission and was also discharging GST under RCM on such commission paid to directors. AAR, while arriving at decision, relied on the fact that Company, itself, was paying GST on commission paid to director under RCM, and held that GST was chargeable on remuneration paid to directors.

One would differ on above, even if the company is paying commission (variable) in addition to the fixed salary to whole-time director, which is within the scope of employment the same will be considered as remuneration and if paid to whole time director the same will not be chargeable to GST.

Judgement of AAR has only created the confusion which will lead to litigation, as the department will want to levy GST on remuneration paid to directors irrespective of paid to executive director or non-executive director. Necessary clarification will go long way to ease the burden of litigation on taxpayers and will lead to ease of compliance.

(The views expressed herein are personal views of the Author. The views expressed herein in not intended and shall not be taken as, legal advice. For any further queries, the author can be reached at following Email id: Chhedand@gmail.com)

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