“Understand the three types of payments to directors by a company and their GST impact. Learn about mandatory GST registration, Reverse Charge Mechanism (RCM) notification, and recent clarifications on remuneration to directors. Stay informed to navigate GST implications effectively.”
1. There will be three types of payment to the Directors by a company.
A. As Salary [Employer and Employee Relation] (TDS u/s 192)
B. As Remuneration to the director (TDS us/ 194J)
C. As a Professional fee for the service rendered in a professional capacity.
2. Compulsory Registration under GST[ Section 24]
As per section 24 of the CGST Act, A person shall mandatorily get registered under GST if the person is liable to pay GST under RCM basis.
3. RCM Notification on Payment of remuneration to director
”Services supplied by a director of a company or a body corporate to the said company or the body corporate.” [Notification 13/2017-Central Tax (Rate) dated 28.06.2017 (‘RCM notification’) issued under Section 9(3) of the CGST Act, 2017]
Payment of remuneration to the director by a company is also a transaction liable for payment of GST under RCM.
4. On a combined reading of section 24 and RCM notification:
A company paying remuneration to the director shall get it self-registered under GST even if its turnover does not cross the threshold limit liable for registration on the grounds of section 24.
5. Whether all types of payments as mentioned above in sl. no.1 liable for payment of GST under RCM?
No, Payment of Salary to the director and treating it as salary by deducting the TDS under 192 along with payment of professional tax if applicable will be treated as Salary. Salary paid with employer and employee relation is not at all a supply [Schedule III of section 7]. Whenever it is not a supply, GST implication is not there.
6. Whether payment under professional capacity liable for RCM?
By reading the RCM notification, the service supplied by a director of a company to the company is liable for payment of GST on an RCM basis.
But in our view, the service he is providing to the company shall be in the capacity of the director to be qualified as an RCM transaction.
Our View on the issue:
7. Whether all services provided by the director is in the capacity of director?
No, In terms of Section 197(4) of the Companies Act 2013 Services provided by the director would not be included in remuneration, if provided in other capacity,
such as – (a) The services rendered are of a professional nature; and
(b) In the opinion of the Nomination and Remuneration Committee (if applicable), or the BOD (other cases), the director possesses the requisite qualification for the practice of the profession.
Therefore, there is no restriction that the director cannot provide any services in his own individual capacity to the company in professional nature.
Such payments shall be accounted as professional charges instead of Director remuneration in the books of accounts of the company. Services provided by professionals like Doctors, Technical experts, and chartered accountants to the company being a director of the company will be qualified as professional services.
Therefore professional services provided are outside the ambit of director remuneration by virtue of section 197(4) of the companies act, 2013. Whenever it is outside the ambit of director remuneration by the companies act 2013, it won’t be qualified as director remuneration but as a professional charge. Hence RCM will not be applicable to the same.
Whenever RCM is not applicable, the question of compulsory registration will not arise.
Therefore services provided by the director in the capacity of the director will alone qualify for the GST payment on an RCM basis.
Department Circulars and Recent AAR
But recent AAR and departmental circulars are contradicting our view on the issue.
Advance ruling in Clay Craft India Pvt Ltd[4] The applicant was paying salary to its director. Accounted as “Income from Salary” by the Directors in their personal Income Tax returns. AAR observed that the consideration paid to the Directors is against the supply of services provided by them to the applicant company and are not covered under Schedule III to the CGST Act, 2017 .The Directors are not the employee of the Company.
AAR held that the director is the supplier of services and the applicant company is the recipient. So, it is very clear that the services rendered by the director to the company for which consideration is paid to them in any head are liable to pay GST under RCM.
The Authority for Advance Ruling (AAR) at Karnataka, in the case of Alcon Consulting Engineers[5], had taken an identical view, on the same grounds relying on the aforesaid rulings.
It is important to note that the AAR pronouncements are applicable to the applicants who sought the AAR. And it is not binding on others. But the view shall be considered.
CBEC-20/10/05/2020 -GST-Circular, dated the 10th June, 2020
As per para 4 of the circular, payment of remuneration to directors of the company, if those directors are not the employees of the company, then the GST shall be paid on an RCM basis.
Para 5.3 of the circular clarified where the payment to the director is accounted as salary and TDS deducted under section 192 as salary will be classified as schedule III transaction, hence not liable for the payment of GST on RCM basis.
Para 5.4 of the circular said, the part of the 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.
The said clarification in 5.4 of the circular is contradictory to our view on the issue.
It is important to note that the many decision by the courts including the Apex court decided circulars are only binding on the department. And it is not binding on the taxpayer or courts.
But the department notices for the non-payment of GST on an RCM basis on payments to the director either under professional grounds or in the capacity of the director may cause an uncomfortable situation for the business entities.
Moreover, the combined application of compulsory registration and RCM will hit the business. Because once a business is liable for registration and gets itself registered under GST law it has to discharge GST on an RCM basis and GST on its supplies. It can’t just discharge tax on an RCM basis and take the benefit of the thresh hold limit for the value of supplies.
But in our view, if any business receives notice for the payment of GST on an RCM basis for payment of remuneration for professional grounds, it is an appealable case.
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