WILL THE REMUNERATION PAID BY A COMPANY TO ITS DIRECORS ATTRACT GST UNDER THE REVERSE CHARGE MECHANISM?
1. PECULIAR LEGAL FICTION IN THE GST LAW
- This was there in the erstwhile Service Tax Regime also.
- The Principle is simple—“If you are unable to tax a category of persons who supply the services, call the poor recipient of the services as the “SUPPLIER” and tax that person/ Firm/company/Corporate Body!
- Till today, the Central Govt has not been able to levy service tax (earlier) and now GST on the Road Transport Sector and the Lawyers!
- On both these services supplied to a Business Entity, that Entity, be it a proprietary concern, or a Firm or a Company, steps into the shoes of the Service Supplier and has to pay GST under what is called as the “Reverse Charge Mechanism”.2.THE SECTION THAT EMPOWERS THE CENTRAL GOVT TO LEVY AND COLLECT GST ON “REVERSE CHARGE BASIS”
- Section 9(3) of the CGST Act, 2017, empowers the Government, on the recommendation of the GST Council, to issue Notifications specifying the category of supply of goods or services or both on which the GST shall be paid by the RECIPIENT of the supply of goods or services or both!
2. THE CBIC BUREAUCRATS ARE PROMPT IN ISSUING NOTIFICATIONS!
- Very promptly ( I am even now not sure whether the GST Council ever made such a detailed recommendation on this Reverse Charge Mechanism), the CBIC issued a long Notification No.13/2017—Central Tax (Rate) dt.28.06.2017 ( even before the GST came into existence w.e.f. 01.07.2017).
- This Notification has a TABLE having only 9 entries at that time ( do not ask me how many more entries have been added in the last three years—no one can keep a count of this)
- Entry No. 6 of this TABLE is what we are going to talk about now and this pertains to the DIRECORS of a Company or a Body Corporate.
3. ENTRY NO.6 IS VERY CLEAR
- The Entry No.6 in the Table of the above Notification specifies that in respect of the SERVICES SUPPLIED by a DIRECTOR of a Company or a Body Corporate to the company or the Body Corporate, the applicable GST SHALL BE PAID BY THE COMPANY OR THE BODY CORPORATE ON “REVERSE CHARGE BASIS”!
- But as we know, the whole time Directors of a company supply their services as EMPLOYEES of the Company under specific Employment Contracts with the Company.
- In other words, they are the employees of the Company in every sense of the term.
- Accordingly, the Company deducts TDS on the salary paid to them under Section 192 of the Income Tax Act, 1961.
- The Directors submit their IT Returns showing the salary received from the company as “Income under the Head Salaries” and the IT Dept has been for decades, accepting these returns for the salary received from the company.
- The company, in addition, may also be paying a Director, a commission on marketing or profits or whatever, but that is shown separately by the company as “Commission Paid” and tax is deducted at source from such payments under Section 194J of the Income Tax Act, 1961 at 10% as “Fees for Professional Services” and NOT as salary under Section 192 of the Income Tax Act, 1961.
4. THE TAXMAN’S DILEMMA
- The law makers including the CBIC draftsmen knew pretty well as you and me that the whole time and most of the other Directors EXCEPT the “Independent Directors” appointed under Section 146(9) of the Companies Act,2013 are ALL ,IN FACT EMPLOYEES OF THE COMPANY.
- It is a different matter that they may also be shareholders receiving dividend declared by the company. That is not taxed as salary in their hands; in fact it is the company that pays 15% tax on the dividends distributed by it.
- So, if the GST liability on the supply of service by the Director-Employee can be shifted to the company on Reverse Charge Mechanism Basis (RCM), what about the Non-Director Employees???
- Naturally, the same logic must apply to them also and for them also, the company has to pay GST under the RCM!
5. LAW MAKER RESORTS TO HALF MEASURE, SHORT CUT
- AS USUAL IN INDIA, THE LAW MAKER RESORTS TO SHORTCUT PATCHWORK TO FIX THIS DILEMMA (FOR HIMSELF, NOT FOR THE TAX PAYER OR THE JUDICIARY)
- Thinking he is ingenious, the Law Maker quietly introduced ENTRY NO.1 in SCHEDULE-III to the CGST Act, 2017.
- Schedule III, fathered by Section 7 of the CGST Act, 2017 chooses to specify certain supplies of goods and Services
“Which shall be treated as NEITHER as supply of goods NOR supply of Services!
- Entry No.1 of this Schedule declares –“Services supplied by an EMPLOYEE to the Employer in the course of, or in relation to his employment” WILL NOT BE TREATED AS A SUPPLY OF SERVICE AT ALL!
6.CREATING AVOIDABLE AMBIGUITY HINDERS EFFICIENT TAX ADMINISTRATION AND THUS DEFEATS THE PM MODI GOVT’S DECLARED OBJECTIVES
- The Law Maker imagined that he can successfully gloss over stark realities by calling the Directors’ remuneration rendered in pursuance of a contract of employment as “Supply of Services” to the company while calling such services rendered by a Non Director EMPLOYEE as NOT SERVICES at all through a legal fiction.
- But whether the GST law maker or the bureaucrats in the CBIC close their eyes on it or not, the Judiciary will never go with the Law Maker and accept the dichotomy introduced between the Notification No.13/2017 and the Entry No.1 in Schedule III to the CGST Act, 2017.
7. THE RITUAL CALLED THE “ADVANCE RULINGS”
- With the professed aim of clearing the doubts of the Tax Payer in advance, the CGST Act, 2017 constituted “Advance Ruling Authority” in each State under 96.
- This Authority in each State is presided over after all by Departmental Officers.
- They keep on giving hundreds of pro-revenue “Rulings” on matters referred to them by anxious Business Entities who wanted to know the Taxman’s interpretation of the law in advance, abide by whatever “Ruling” these Authorities keep giving on matters referred to them under Section 97(2) and 100(1) of the CGST Act,2017.
- The tragedy is that the Centre has failed miserably to constitute GST Appellate Tribunals, the INDEPENDENT Adjudication Bodies, and make them functional EVEN AFTER THREE AND A HALF YEARS OF THE GST coming into force.
- So, the tax payer for 42 months now, has no appellate remedy against an order passed by an Officer of the Dept!
- In many cases, the Tax Payer is forced to take refuge in the Writ Jurisdiction of the High Courts under Article 226 of the Constitution even if a truck is detained whimsically by the GST Field Formations!
8. TWO STATE AARs GIVE EXPECTED RULINGS ON DIRECTORS’ REMUNERATION—NO SURPRISE AT ALL!
- In the case of M/s Alcon Consulting Engineers (India) Pvt. Ltd. (GST AAR Karnataka); Advance Ruling No. KAR ADRG 83/2019;Date of Judgement/Order : 25/09/2019 and
- In the Clay Crafts India Pvt. Ltd. (GST AAR Rajasthan) Appeal Number: Advance Ruling No. RAJ/AAR/2019-20/33;date of Judgement/Order: 20/02/2020;Courts : AAR Rajasthan(91);
- Both these AARs did not cause any surprise to anyone; they merely repeated, parrot like the Entry No.6 of the Notification No. 13/2017 mentioned above and “Ruled” that on the remuneration paid to the directors by a company as SALARIES the company only has to pay GST on Reverse Charge basis.
9. THE INDUSTRY & THE TRADE BODIES A LAST MANAGE TO WAKE UP THE CBIC BOSSES.
- Compelled to see logic and reason, the CBIC has at last issued a “clarificatory” CIRCULAR No. 140/2020 on 10.06.2020—“ In order to ensure uniformity in the implementation of the provisions of the law across the field formations, the Board, in exercise of its powers conferred under section 168(1) of the CGST Act hereby clarifies the issue as below:
- The relevant portion of the Clarification is titled as below:-
Leviability of GST on remuneration paid by companies to the directors, who are also an employee of the said company
The Circular instructs the Field Formations to approach the problem like this:–
Ascertain if the Director is an Employee of the Company( there will be invariably a Contract of Employment);
Find out if the Company is debiting the remuneration paid to the Director to the “SALARIES ACCOUNT” in its Books;
Find out whether the Company is deducting TDS under Section 192 of the Income Tax Act, 1961.
IF THE ANSWER TO THESE THREE QUERIES ABOVE ARE “YES”, just accept that the DIRECTOR is also an EMPLOYEE of the Company and THEREFORE, Entry No.1 of SCHEDULE-III to the CGST Act, 2017 shall become applicable and THEREFORE, the Company SHALL NOT BE LIABLE to pay GST on the remuneration paid to the Director on Reverse Charge Basis IN SPITE of Entry No.6 of Notification No.13/2017 dt.28.06.2017 mentioned above.
The Circular also bowls a Googly as given below:-
It wants its Field Formations to find out whether all the services provided by the Director are in the nature of “CONTRACT OF SERVICE”, meaning Employer-Employee relationship.
If yes, the whole of the remuneration paid to the Director shall be exempt from GST under Entry No.1 of Schedule—III to the CGST Act, 2017.
If the Director also supplies services which are in the nature of “CONTRACT FOR SERVICE” and if the company pays a separate amount to him as “Fees for Professional Services” and deducts TDS under Section 194 J, THEN, ON THE AMOUNT OF FEE SO PAID TO THE DIRECTOR, THE COMPANY SHALL HAVE TO PAY GST UNDER RCM AS PER THE NOTIFICATION NO.13/2017 dt.28.062017.
A WORD OF CAUTION TO COMPANIES
10. Many companies, in order to get out of the rigours of the labour Laws give “Contracts FOR Service” even to their workmen.
- Now, even if the company debits the Salary and Wages Accounts with the amounts paid under such Contracts, the “Field Formations” shall be tempted to do their own research to find out if the people covered under such “Contracts FOR Service” are really the Company’s employees or Professionals just providing their Services and getting paid a “fee’ for the same.
- I have no doubt on the research findings— the finding shall indeed be that these men and women are independent Professionals rendering their services and are NOT employees of the Company.
- And therefore, the company is liable to pay GST on the “fee” paid to its employees on RCM basis.
- So, the companies shall do well NOT to call such Employee Contracts as Contracts FOR Service and score self-goals with the GST Dept.
- Such “Contracts FOR Service shall not wash with anyone when the fact is that there is a clear Employer-Employee Relationship between the Company and the Employees.
- They are covered under PF and ESI, you deduct TDS under Section 192 of the Income Tax Act
- Thus such companies just CANNOT defend the piece of paper called the Contract “FOR” Service in the case of their employees.