Whether remuneration paid to directors as per employment contract is liable to tax under GST (RCM) or not

GST on directors remuneration

Schedule III ( see section 7)

ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES

1.Services by an employee to an employer in the course of or in relation to his employment

Understanding of the Text:

“Services supplied by the director of a company or a body corporate to the said company or the body corporate.”

Let us take some examples to analyse the meaning of the text:

1. Mukesh Ambani is using Jio number and is paying charges for the same. Whether the above service by Jio company is service to a director or service to a consumer?

In the above question Mr. Ambani  is using jio number as a consumer and not in the capacity of director. Therefore using jio number shall not be construed  as service to a director.

2. Mr. X a CA of a company has reached the level of CFO and now to give him a promotion he was inducted in the board of directors and his role has not changed whether merely because he is Director now will he not be considered as an employee of the company.

In the above case Mr. X was being inducted to the post of director only for the promotion sake and his role has not changed. He is still working in capacity of an employee. Thud the salary paid to him shall not be included as  remuneration for the services provided by the director.

3. HP CEO(whole time director) uses HP cylinders for his household purposes in this case whether the transaction by HP is supply to a director or supply to a consumer?

Use of cylinders by CEO of HP for his household purposes is in the capacity as a normal consumer and the supply of the same should be considered as a supply to consumer and not as a director.

4. A is owner of a big commercial space, assuming it has 10 offices and he has let out 10 offices to different companies and one of the office is given to a company in which he is a Director. Whether in this case it is a supply by a Landlord to a company or Director to a company?

Here the transaction between the director and the company is a normal business transaction unless the rent paid by company is prejudicial to its interest i.e  the transaction should be at fair value or arm’s length price. Supply should be considered as a supply by landlord to the company.

 Extract of Notification No 13/2017:

Advance Ruling:

Case of M/S. CLAY CRAFT INDIA PVT. LTD. [2020 (4) TMI 228] – decided by AAR – Rajasthan:

Facts of the case: 

• The company is having 6 directors in its board. The company is paying salary and other allowances as per their policy and employment contract.

• Further, the company has been deducting TDS on such salary and directors treating the same amount as their Income under head Salary in their personal Income Tax returns.

• The company seeks advance ruling in view of advance ruling by Hon’ble Authority of Advance Ruling, Karnataka (Bangaluru) given in the case of M/s. Alcon Consulting Engineers (India) Pvt. Ltd. Bangluru (AR No. KAR ADRG 83/2019) dated September 25, 2019 which held that the remuneration payable to director are subjected to GST under RCM.

• The company submitted that services provided by an employee to his employer are under clause 1 of the Schedule Ill which relates to the activities which are not treated either as supply of Services or Goods.

• The company submit that Hon’ble Supreme Court in the case of Ram Pershad vs Commissioner of Income-Tax, New … on 24 August, 1972 1973 AIR 637, 1973 SCR (3) 985 = 1972 (8) TMI 61 held that remuneration payable to director is a salary if the powers of the director have to be exercised within the terms and limitations prescribed thereunder and subject to the control and supervision of the Directors.

• The Company further submit that the definition of director under section 2(94) of the companies is inclusive definition which specifically mentioned that director includes director who has been in employment of the company on a fulltime basis.

• From above legal pronouncement and the article of association and memorandum of Association of the Company, it is amply clear that the Board of Director who appoints the Director and other whole time director and once it is admitted that there is an appointment then it is obvious that there exist a relationship of employer and employee between the Board of Director and Managing Director/ Wholetime Director.

Issue to be resolved:

Whether remuneration paid to directors as per employment contract is liable to tax under GST(RCM) or not and if the situation changed if the director is also part time director under some other company also.

Ruling:

The Advance ruling authority held 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 clause (1) of the Schedule Ill to the CGST Act, 2017 as the Directors are not the employee of the Company.

• The notification No. 13/2017- Central Tax (Rate) dated June 28, 2017 has given the distinct identity to the services provided by the Director and specifically included in the category of service on which GST will be payable under RCM.

• In the instant case Director is the supplier of services and the applicant company is the recipient of the services. Hence, it is very clear that the services rendered by the Director to the company for which consideration is paid to them in any head is liable to pay GST under RCM.

Our Comments: 

The AAR held that remuneration payable to all directors  is liable to GST under RCM. The AAR does not provide any basis for giving ruling that the director is not the employee of the Company. Hence, the ruling is baseless and this ruling is applicable only in case of the company who sought it.

As per our view, remuneration payable to the director who is under employment contract with the  salary is covered under schedule III of the CGST Act. Therefore, not subjected to GST under RCM. This AAR should be clarified by the Government in order to avoid situation where lower tax authorities take incorrect legal view to create havoc in the industry.

What if the director is also part time director under some other company also?

• From the facts mentioned in the above ruling it is clear that the services rendered by the Director to the company for which consideration is paid to them other than salary  is liable to pay GST under RCM.
• the situation will remain same in case such director is also a part time director in other company and will attract GST under reverse charge mechanism.

Conclusion:

• There will be No GST on salary to any person including director (Sec 9 read with Sec 7 and Schedule 3).
• Forward charge in case director is providing any service in the capacity other than director.
• RCM on all amount paid to director except mentioned above paid to him which is in relation to his directorship example sitting fees, professional charges for professional director and like items.