In the erstwhile service tax regime as well as in GST regime, the services provided by director to company are liable to service tax / GST under reverse charge. It is the company who has to pay the service tax / GST and not the director. Relevant legal provisions are given below:
|Sl. No||Description of a service||Percentage of service tax payable by the person providing service||Percentage of service tax payable by any person liable for paying service tax other than the service provider|
|5A||in respect of services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate||Nil||100%|
GSR……(E).- In exercise of the powers conferred by sub-section (3) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government on the recommendations of the Council hereby notifies that on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4) of the said Table:-
|Sl. No||Category of Supply of Services||Supplier of service||Recipient of Service|
|6||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 can be seen from the above that services provided / supplied by a director to the company or body corporate are liable to tax under RCM.
No ST / GST on remuneration if director is employee:
Remuneration paid to directors who are whole time directors or employee of the company is outside the purview of service tax / GST as services provided by the employee to the employer in the course of employment were not taxable under sec 65B (44) (b) of erstwhile Finance Act 1994 and Sch III SN 1 of CGST Act 2017.
GST on services by non employee director: Whether all services liable to reverse charge?
In case of directors who are not employees, the services provided by director to company are liable under RCM. Here lies the real twist. Whether all services supplied by the director are liable to reverse charge or whether services supplied in the capacity of a director are liable to reverse charge is not clear. If we read all serial numbers of the notification 13/2017, we find that in all entries except serial numbers 6, 7 and 8, the specific service supplied by the supplier is mentioned. However, in serial number 6, 7 & 8 it only mentions services supplied by director / insurance agent / recovery agent. It does not specify a particular type of service. Therefore, the plain language employed in these entries suggests that any services or all services supplied by the director are liable under reverse charge. It can be argued that if the law makers wanted only the services as director to be covered under RCM, they might have said “services supplied by a person as a director to the company….” instead of “services supplied by the director of a company…”
On the contrary, one may interpret that only services provided as “director” are liable to reverse charge – for example – director’s remuneration (in case of non employee directors), sitting fees etc. This interpretation draws strength from the wordings of SN 7 & 8 also. Because if all services are assumed to be liable to reverse charge, then there would arise a strange situation where any and every service supplied by insurance agent to insurance company or recovery agent to banking company will be liable to reverse charge. But this does not seem to be the intention.
It is necessary that government makes a clarification on this subject.
Confusion and its implications:
Because of this confusion and because some people believe that services as director only are covered under RCM, at present in many cases the companies are not paying GST under RCM. Typical examples include:
Possible risk to companies:
The department may ask the companies to pay GST on such payments to directors under RCM. For example in case of job work charges paid to proprietary firm of a director, the director may be registered under GST and he might have charged GST to company. The department may seek to demand GST under RCM, or may seek to disallow ITC by taking a stand that the amount paid by the supplier director is not correctly paid as GST. However, revenue neutrality is the strongest point in favour of the company. But the pains of litigation may arise.
Possible risk to directors:
If the director and company are under belief that other services e . g. rent, job work etc are covered under forward charge and the director is collecting and paying under forward charge, the director is running a risk. If the services are held to be covered under RCM, then the department will seek to disallow ITC, if any, availed by the director in supplying these services. This disallowance is under section 17 (2) and (3) of the CGST Act. These sections provide that ITC of goods / services used in supplying exempt services are disallowed and that the outward supplies liable to RCM are treated as exempt supplies for this purpose. Therefore, the department may recover ITC availed by the supplier director. This could be a sizable amount in case of job work services or similar services. Further, claiming refund of output GST wrongly paid may be difficult in view of unjust enrichment as GST is collected from the company.
Breaking the ITC chain:
If the interpretation that all services supplied by director are covered under RCM is adopted, then as we can see from the discussion above, it results in breaking of ITC chain – that the director supplier un necessarily loses ITC. This is against the very spirit of VAT taxation.
Therefore, it is suggested that government should amend the notification to provide that if the director is a registered person, then the service would be covered under forward charge.
(Author – Kuldeep Kulkarni is from Kolhapur and is a Indirect Taxes Practitioner)