END OF LITIGATION OF GST ON DIRECTORS’ SALARY
[CIRCULAR NO. 140/2020 DATED 10.06.2020]

 You are aware that the matter regarding applicability of GST on Director remuneration paid to full time / executive Directors has been subject to different interpretations in various ruling of AAR. Till date, there has been a lot of anxiety and confusion among directors and companies, specially after some of the recent adverse rulings by authorities such as in the case of Clay Craft India Pvt Ltd. by AAR, Rajasthan and Alcon Consulting Engineers (India) Pvt Ltd. by AAR, Karnataka. In some Ruling it is adjudged that such remuneration would be subject to GST under reverse charge while in the recent one, ruling was given that remuneration paid to full time directors is not eligible to GST.

Considering the dilemma of the tax payers as they were confronted from contradictory / different ruling in regard to GST on remuneration to Directors, it has now finally been clarified by CBIC. Now, CBIC clarifies through Vide Circular No: 140/10/2020 – GST Dated 10th June, 2020 as under-

  • Leviability of GST on remuneration paid by companies to the independent directors or those directors who are not the employee of the said company and
  • Leviability of GST on remuneration paid by companies to the directors, who are also an employee of the said company

CBIC mentioned that “various references have been received from trade and industry seeking clarification whether the GST is leviable on Director‟s remuneration paid by companies to their directors. Doubts have been raised as to whether the remuneration paid by companies to their directors falls under the ambit of entry in Schedule III of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act) i.e. “services by an employee to the employer in the course of or in relation to his employment” or whether the same are liable to be taxed in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017 (entry no.6).”

The said issue of GST leviable on Director’s Remuneration has been examined in two different categories-

(1) leviability of GST on remuneration paid by companies to the independent directors defined in terms of section 149(6) of the Companies Act, 2013 or those directors who are not the employees of the said company; and

(2) leviability of GST on remuneration paid by companies to the whole-time directors including managing director who are employees of the said company.

A. Leviability of GST on remuneration paid by companies to the independent directors or those directors who are not the employee of the said company.

[ i.e. GST on Salary of Directors who are not employees of company]

In respect of directors who are not the employees of the said company, the services provided by them to the Company, in lieu of remuneration as the consideration for the said services, are clearly outside the scope of Schedule III of the CGST Act and are therefore taxable in GST.

Accordingly, it is clarified that the remuneration paid to independent directors, or those directors (by whatever name called, who are not employees of the said company) is taxable under GST in hands of the company under reverse charge mechanism.

Note: The primary issue to be decided is whether or not a “Director” is an employee of the company. In this regard, from the perusal of the relevant provisions of the Companies Act, 2013, it can be inferred that:

a) the definition of a whole time-director under section 2(94) of the Companies Act, 2013 is an inclusive definition, and thus he may be a person who is not an employee of the company.

b) the definition of “independent directors”under section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it amply clear that such director should not have been an employee or proprietor or a partner of the said company, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.

B. Leviability of GST on remuneration paid by companies to the directors, who are also an employee of the said company.

[i.e. GST on Salary of Directors who are also the employees of company]

Once, it has been ascertained whether a director, irrespective of name and designation, is an employee, it would be pertinent to examine whether all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service” i.e. employment) or is there any element of “contract for service”.

The issue has been deliberated by various courts and it has been held that a director who has also taken an employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other on the basis of the contractual relationship of master and servant with the company, i.e. under a contract of service (employment) entered into with the company.

It is also pertinent to note that similar identification (to that in Para 5.1 above) and treatment of the Director’s remuneration is also present in the Income Tax Act, 1961 wherein the salaries paid to directors are subject to Tax Deducted at Source (‘TDS’) under Section 192 of the Income Tax Act, 1961 (‘IT Act’). However, in cases where the remuneration is in the nature of professional fees and not salary, the same is liable for deduction under Section 194J of the IT Act.

Accordingly, it is clarified that the part of Director’s remuneration which are declared as “Salaries” in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.

It is further clarified that the part of employee Director’s remuneration which is declared separately other than “salaries” in the Company’s accounts and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable. Further, in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.

In view of the above, it is clarified that:

1. No GST on Director remuneration declared as Salaries in the books: Part of Director’s remuneration which are declared as “Salaries‟ in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.

2. GST under Reverse Charge on Director remuneration which is subjected to TDS u/s Section 194J: Part of employee Director’s remuneration which is declared separately other than “salaries” in the Company’s accounts and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable. Further, in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.

*****

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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