Rajasthan AA Citation:

Companies will have to pay GST on the remuneration they dole out to directors, the Authority for Advance Ruling (AAR) has said. In an application filed before the Rajasthan bench of the AAR, Clay Craft India Pvt Ltd had sought clarification on whether salaries paid to directors would attract Goods and Services Tax.

Companies Stance

The company said its directors are working as employees for which they are being compensated by way of a regular salary and other allowances.

“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,” it said.

1. There is employer employee relataionship

2. Company is deducting tds on the salary

3. Pf is also being deducted

AAR Stance

In its ruling, the AAR said, “the consideration paid to the directors by the applicant company will attract GST under reverse charge mechanism…”

The AAR, while analysing the case, said that Director is the supplier of services and the applicant of the company is the recipient of the services.

It said that the Central Tax (Rate) notification clearly states that services supplied by a Director of a company will be considered as supply and hence directors cannot be called an employee.

“So 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 (Reverse Charge Mechanism),” the AAR order said.


As per AAR, gst rcm is applicable on director’s salary.


This ruling needs to be clarified by government, otherwise, lower authorities may take legally incorrect view creating havoc in the business community


Types of Directors under Companies Act 2013

1. Executive Working director’s like MD or WTD or ED

2. Non-executive directors like nominee, independent or ordinary who attends only Board meetings

Types of services provided by directors

1. Management Consultancy charges

2. Renting of property to the company

3. Commission being not part of the salary

4. Guarantee Commission

In this case, there is clear finding that the company is deducting TDS on their salary and also making contribution towards PF on salary being paid to Directors. There is no dispute that incumbents are whole time employees of the company. Clause I of Schedule III clearly holds that services by employee to employer in the course of employment are neither supply of services nor supply of goods. Section 7 (which define supply) which is liable to GST. The Sub (2) Of Section 7 of GST which in the nature of overriding provision (overriding to Section 7) clause clearly, inter alia, says that activities specified in Schedule III shall not be treated as supply.  The Press Release by Ministry of Finance dt 10th July 2017 clearly says that services by employee to employer is outside the purview of GST. Further in pre GST regime Para 2.9.1 of Service Tax Education Guide 2012 issued by the Ministry of Finance also clearly says services provided by the employee  to the employer are outside the purview of ” Services”.

Further FAQ released by CBIC (question 23) clearly holds that services by employee to employer shall  be treated neither supply of goods nor services.

The AAA has merely picked up the word from central tax notification notifying rate of tax and holds that since notification talk of rate of tax hence salary paid to Director is taxable ignoring the elementary principle of taxation that charging Section determine taxability of subject and not notification specifying rate of tax.

Further ignoring the elementary principle of law that there are types of Directors one Non-Executive Director like ordinary nominee or independent Director and another category is Director (who are executive) i.e. MD or WTD.  It is clearly understood that Sitting Fees or Commission paid to Non-Executive Director (Nominee Independent or Ordinary) is liable to GST on Reverse Charge Basis and this notification deals with rate of tax in relation to sitting fees. Further Ministry of Corporate Affairs issued Circular No. 24/2012 dt 9.8.2012 vide which it was clarified that Non whole time Director are not covered under the Exemption List and hence sitting fees and commission payable to them is liable to Service Tax. In other word, remuneration payable to executive directors is not subject to tax.

AA just relied on notification no 13/2017 dated 28.06.2017 while taxing the salary paid to directors

Further AA of Karnataka (on the contrary) in the case of Alcon Consulting Engineers India P Ltd recorded a finding in para 5 that the Directors i.e (ordinary nominee and independent) are not employees of the Company and therefore remuneration paid to them is taxable.

Hence, any amount given to executive directors under Letter of Appointment being salary or remuneration, allowances, perks which is a part of the salary package should be exempt as per Schedule III Clause 1 since the same is neither a supply of goods or services.

For any other amount being paid, like commission, rent, consultancy charges, gst to be forward charged @ 18% by the director.

The non-executive directors which do not get salary; are provided with sitting fees or commission based on net profit formula or guarantee commission. RCM need to be paid by the company @ 18% in such cases. On rentals paid by company to the director, gst forward charge to be paid by director.

While every care has been taken to ensure the accuracy/ authenticity of the above, the readers are advised to recheck/ reconfirm the same from the original sources/ relevant departments. The company shall in no way be responsible for any loss or damage suffered to any person on account of the same

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April 2021