Section 9(1) of the CGST Act,2017 is the basic provision which provides for levy of GST on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption.
The question of payment of GST under reverse charge would arise only when the said transaction qualifies to be a ‘supply’ under Section 7 of the CGST Act. For example, services provided by an employee to the employer is specifically excluded from the scope of supply. Hence, the question of payment of GST in case of payments made to a person, in the capacity of an employee, does not arise.
The concept of reverse charge mechanism has been provided to shift the liability for making payment of GST in the hands of the recipient. The coverage of services, the provider of service and on whom the said liability is shifted under RCM, is provided under a specific notification.
Notification 13/2017-Central Tax (Rate) dated 28.06.2017 (‘RCM notification’) issued under Section 9(3) of the CGST Act,2017 provides for payment of GST under reverse charge mechanism for services provided by a Director of a Company to the said Company. More specifically, the said entry under the notification reads as under
|Category of Supply of Service
|Supplier of Service
|Recipient of Service
|Services supplied by a director of a company or a body corporate to the said company or the body corporate.
|A director of a company or a body corporate
|The company or a body corporate located in the taxable territory.
It is to be noted that the RCM Notification does not use the phrase ‘services provided by any person to a Company, who is a Director in the said Company’. Instead, it uses the phrase ‘services supplied by a Director of a Company’. Hence it is clear that the said notification covers only those services which are provided in the capacity of a Director.
In this context, the Department vide a recent Circular No. 140/10/2020 – GST dated 10.06.2020 had clarified in respect of levy of GST on Director’s remuneration. Some of the key aspects of the said Circular are as under
a) It is hereby clarified that the remuneration paid to such independent directors, or those directors, by whatever name called, who are not employees of the said company, is taxable in hands of the company, on reverse charge basis (Para 4.3)
b) 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 (Para 5.3)
c) 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 (Para 5.4)
It is specifically noted that the said Circular has emphasized the words ‘Director’s remuneration’ and it is abundantly clear that the Circular covers the aspect of remuneration paid to a Director, in his capacity as a Director. This aspect also supports the view that the services which are provided in the capacity of a Director would only be covered under the reverse charge mechanism. The RCM notification does not appear to cover services which are provided in the independent capacity of the Director, as it would not form part of the remuneration paid to the Director in the said capacity.
Also, under entry no.6 of the RCM notification, the supplier of service should be a Director of the said Company. A ‘Director’ by itself is not a person, but a position in the Company which is held by a person. When the services are provided in the independent capacity of an individual, it cannot be said it is the Director who has provided the said service. For instance, when a Director provides his commercial property for rent to the Company, it cannot be construed that it is a service provided by the Director in his capacity as a Director of the Company. On the other hand, it is a service provided in the individual capacity of the Director (i.e. as a third party), on which consideration is paid for the property provided on lease.
Hence, the test would be to determine whether the service is provided by a person to the Company, in his capacity as a Director or otherwise. The requirement to pay GST under RCM would arise only when it is provided in the capacity of a Director. The exclusion of employer-employee relationship under Schedule III of the CGST Act,2017 shall be evaluated in case of such transactions.
Reference to the Companies Act,2013
In this regard, one can draw reference to some of the provisions of the Companies Act,2013 which deal with the aspect of remuneration paid to the Directors. Section 197 of the Companies Act provides for overall limit of remuneration payable to the Directors of a public company.
The proviso to Section 197(4) of the Companies Act,2013 specifically provides that any remuneration for services rendered by any such Director in other capacity shall not be so included under remuneration paid to the Director if—
Further, we understand that when the services are provided by a Director in his independent capacity, the provisions under Section 188 of the Companies Act,2013 (i.e. related party transactions) would apply. Specific procedures and safeguards have been provided with regard to such transactions with Director’s in their independent capacity.
Section 197(5) of the Companies Act,2013 provides that a Director may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board. The amount of sitting fee paid to Director is considered to be part of the remuneration paid to the Director, however not in nature of salary payment. Hence, TDS under Section 194J of the Income Tax Act,1961 is deducted on such payments.
It emerges from the foregoing provisions that there is a clear distinction between what would be considered as remuneration paid to a Director and what would be a remuneration/consideration paid in the independent capacity of a Director. It is not a case where all payments are made to a Director just because he/she is a Director of the Company. A Director in his independent capacity, having requisite qualification and skills, could provide specific services to the Company and the consideration for the said service would be dependent on the nature of service provided.
Reference of TDS provisions in the Circular
The reference made to the TDS provision under the Income Tax Act,1961 shall apply only to the extent of remuneration paid to the Director. This aspect is abundantly clear from the wordings of the said Circular. Any other payment made to the Director which are not in the nature of remuneration, are not covered in the said Circular.
For instance, payment of sitting fee to a Director would be relevant for the purpose of evaluation of the Circular, as it considered to be part of remuneration paid to the Director. TDS deducted on sitting fee under Section 194J of the Income Tax Act,1961 would be covered within the ambit of RCM.
Further, the Circular does not envisage a scenario where rent payments are made to Directors and TDS is deducted under Section 194I of the Income Tax Act,1961. It can be inferred that since such payments are made in their individual capacity, the question of RCM on such payments would not arise and hence not covered under the Circular. TDS implications on payment made to a Director in their independent capacity, would not have any relevance to determine the GST liability under RCM.
It is possible to conclude that the Company would not be required to pay GST under RCM for the services provided by the Directors, in their independent capacity. Further, if a view is taken that the Director is not required to charge GST under forward charge (provided they are required to take registration under GST), there could be a possibility of future tax demands in the hands of the Director.
Acknowledgements: Special thanks to CA Shilpi Jain for providing her inputs on the said article.
(For any feedback or clarification please write to firstname.lastname@example.org)