Remuneration paid to director to attract GST under RCM

Issue involved: Remuneration paid to director to attract GST under RCM.

Rajasthan bench of the AAR in the case of Clay Craft India Pvt. Ltd

Fact of the case:

M/s Clay Craft India Pvt. Ltd is already paying GST by way of RCM on the commission paid to its Director.

It filed an application before Rajasthan bench of AAR seeking clarification whether salary paid to directors would attract GST.

The company said its directors are working as employees for which they are being compensated by way of a regular salary and other allowances as per the Company policy and as per their employment contract.

The company is deducting TDS on their salary and PF laws are also applicable to their service. Therefore, in all practical purposes these directors are the employees of the company and are working as such besides being Director of the company

AAR Findings:

Regarding the remuneration to Directors paid by applicant, the services provided y the Directors to the Company are not covered under clause (1) of the Schedule III to the CGST Act 2017 as the Director is not the employee of the company.

Director is the supplier of services and the applicant of the company is the recipient of the services and hence directors cannot be called an employee.

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 (Reverse Charge Mechanism)

It took into consideration Central Tax Rate Notification No 13/2017 (entry 6) which clearly states that services supplied by Director of a Company or a Body corporate to the said Company or Body corporate will be considered as supply and hence director cannot be called an employee .

Our comments:

This ruling just held that the employees are not directors without any reasoning and without considering various facts in the case as to terms of appointment of director, TDS and PF deduction etc. and this advance ruling is not a reasoned ruling.

We are of the opinion that AAR ,with due respect, has erred in understanding the factual position that director is providing service as a result of employment contract and thus Directors service to Company is not liable to GST.

It’s also pertinent to understand AAR implication and it’s binding only on the person who has sought it and on the concerned officer in respect of the applicant.

(Section 103 of the CGST Act)