Understanding GST Implications on Director’s Remuneration

1. Introduction:

• The circular, No. 140/10/2020 – GST, issued by the Government of India’s Ministry of Finance, Department of Revenue, Central Board of Indirect Taxes and Customs, aims to provide clarity regarding the levy of Goods and Services Tax (GST) on director’s remuneration paid by companies.

2. Definition of Director’s Remuneration:

• Director’s remuneration refers to the compensation paid by companies to individuals serving as directors.
• The circular addresses two categories: remuneration paid to independent directors or non-employee directors, and remuneration paid to directors who are also employees of the company.

3. GST Implications for Independent Directors or Non-Employee Directors:

• Independent directors, as defined by the Companies Act, 2013, are not employees of the company.
• Services provided by such directors to the company are taxable under GST, and the company is liable to discharge GST on a reverse charge basis.
• Example: If a company pays remuneration to an independent director for advisory services, GST is applicable, and the company must pay GST under the reverse charge mechanism.

4. GST Implications for Employee Directors:

• Directors who are also employees of the company may function in dual capacities.
• Remuneration categorized as ‘Salaries’ and subject to Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act, 1961, is not taxable under GST.
• Example: If a company pays a director a fixed monthly salary, subject to TDS under Section 192, this portion of remuneration is exempt from GST.
• However, if the remuneration is declared separately as fees for professional or technical services and subjected to TDS under Section 194J of the Income Tax Act, GST is applicable.
• Example: If a director provides consulting services to the company and receives remuneration separate from their salary, GST is applicable, and the company must pay GST under the reverse charge mechanism.

5. Conclusion:

• The circular clarifies the GST implications on directors’ remuneration based on their employment status and the nature of services provided.
• It emphasizes uniformity in implementing GST provisions across field formations.
• Companies should adhere to these guidelines to ensure compliance with GST regulations.
• Trade notices should be disseminated to publicize the contents of this circular for widespread awareness.

By providing clear guidelines, the circular aims to streamline the taxation process related to director’s remuneration, ensuring adherence to GST regulations while promoting transparency and compliance within the corporate sector.