Explore the importance of managerial remuneration compliance, legal aspects, tax implications, and auditors’ responsibilities under the Companies Act 2013 and Income Tax Act 1961.
> Introduction: Managerial remuneration is a critical component of corporate governance, and it directly impacts the company’s financial performance and stakeholder trust. The Companies Act 2013 has laid down various provisions related to the payment of managerial remuneration, which companies need to comply with. Failure to comply with these provisions can lead to legal and financial consequences.
- Definition of Managerial Remuneration:
The term “managerial remuneration” is not defined anywhere in f the Companies Act 2013. Managerial Remuneration means “any remuneration, by whatever name called, payable to directors including managing director, whole time director and manager Managerial remuneration can be classified into two types, namely:
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- Fixed Remuneration: It refers to the fixed amount of compensation paid to the managerial personnel, such as salaries and other benefits.
- Variable Remuneration: It refers to the compensation paid to the managerial personnel based on their performance, such as bonuses, stock options, and other incentives.
- Importance of Managerial Remuneration
- Ensuring Fairness and Transparency: One of the key reasons for complying with managerial remuneration provisions is to ensure fairness and transparency in the payment of remuneration to the managerial personnel. The Companies Act 2013 has laid down guidelines for the formation of a Remuneration Committee to decide on the remuneration of key managerial personnel, including the CEO, CFO, and Company Secretary. Complying with these guidelines helps in ensuring that the remuneration paid to the managerial personnel is fair, reasonable, and based on industry standards.
- Enhancing Corporate Governance: Complying with managerial remuneration provisions also helps in enhancing corporate governance. The Remuneration Committee is responsible for ensuring that the remuneration paid to the managerial personnel is in line with the company’s financial performance, market conditions, and industry standards. Compliance with these provisions helps in building trust among the stakeholders, including the shareholders, investors, and employees.
- Avoiding Legal Consequences: Non-compliance with the managerial remuneration provisions can lead to legal consequences. The Companies Act 2013 has prescribed penalties for non-compliance with the provisions related to managerial remuneration. For instance, if a company pays remuneration to the managerial personnel without the approval of the Remuneration Committee or the shareholders, it can attract penalties under Section 197 of the Companies Act 2013. Thus, complying with these provisions helps in avoiding legal consequences and safeguarding the company’s
- Meeting Regulatory Requirements: Complying with managerial remuneration provisions is a regulatory requirement for companies. Failure to comply with these provisions can lead to non-compliance with other regulatory requirements, such as those related to corporate governance, financial reporting, and tax compliance. Complying with these provisions helps in meeting the regulatory requirements and avoiding penalties.
> Section 197 of the Companies Act:
- Overview of Section 197: The provisions of Section 197 of the Companies Act, 2013 deals with the managerial remuneration and is applicable only on Public Limited Companies. Private Limited Companies are out of preview of this section. . The section lays down the guidelines for determining the remuneration of the managerial personnel of a company.
- Types of Managerial Personnel: As per the Companies Act, managerial personnel include the managing director, whole-time director or manager, and any other director who is in receipt of remuneration from the company.
- Limits on Managerial Remuneration: . .
- The total managerial remuneration payable by a company to its directors, managing director, whole-time director, or manager shall not exceed 11% of the net profits of the company for that financial The Company may authorise the payment of remuneration to such managerial personnel exceeding the aforesaid limit of 11% of net profit with the approval of shareholders by passing a special resolution in general meeting, subject to provisions of Schedule V of the Companies Act, 2013
- Managerial remuneration payable by a company to managing director, whole-time director or manager shall not exceed 5% of the net profits of the company if the Company has only one managing director or whole-time director or manager. But if there is more than one such director, remuneration payable shall not exceed 10% of net profits of the Company for all of them put together. The above limits, however, can be increased by passing a Special Resolution in the General Meeting.
Further the remuneration payable to directors who are neither Managing Director or Whole Time Director or Manager shall not exceed:
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- 1% of net profit of the Company, if there is a Managing Director or Whole Time Director or Manager; and
- 3% of net profit of the Company, if there is no Managing Director or Whole Time Director or Manager
The above limits, however, can be increased by passing a Special Resolution in the General Meeting.
The remuneration paid to non-executive directors shall be in the form of sitting fees, reimbursement of expenses incurred in the performance of their duties, and commission as a percentage of net profits of the company.
While calculating maximum limit on managerial remuneration, sitting fees and perquisites shall be excluded .
The limits on managerial remuneration are a key aspect of corporate governance and ensure that the interests of all stakeholders are protected. Companies must adhere to these limits and ensure that they do not over compensate their managerial personnel, which can have a negative impact on the company’s financial performance and reputation.
- Nomination & Remuneration Committee: The Companies Act, 2013 requires every listed company and the following classes of public companies i.e., (i) Public company having paid up share capital of rupees ten crores or more; or (ii) Public company having turnover of rupees one hundred crores or more; or (iii) Public company which have, in aggregated, outstanding loans, debentures and deposits, exceeding rupees fifty crore or more to constitute a Nomination & Remuneration Committee consisting of three or more non-executive directors out of which not less than one half shall be independent directors. The Committee is responsible for formulating the policy relating to remuneration for the directors including managing director, whole time director and manager of the company.
> Calculation of Managerial Remuneration:
- Components of Managerial Remuneration: The components of managerial remuneration can include basic salary, allowances, perquisites, bonuses, and stock options.
- Calculation of Remuneration: The calculation of managerial remuneration should be in accordance with the provisions of the Companies Act and the remuneration policy of the company. The remuneration should be approved by the Board of Directors and the shareholders.
- Factors Affecting Managerial Remuneration: The factors that affect managerial remuneration include the company’s size, industry, financial performance, the experience and qualifications of the managerial personnel, and the prevailing market conditions.
> Disclosure and Reporting Requirements:
- Disclosures in the Board Report: The company should disclose the details of the remuneration paid to the managerial personnel in the Board Report, including the names of the top ten highest-paid
- Annual Return Filing: The company should also disclose the details of the remuneration paid to the managerial personnel in the Annual Return filed with the Registrar of Companies.
- Reporting to the Central Government: If there is any noncompliance with the provisions of the Companies Act regarding managerial remuneration, the company and its officers may be liable to penalties. The auditor is required to report any such noncompliance to the Central Government.
- Penalties for Non-Compliance:
> Tax Implications of Managerial Remuneration:
- Applicable Tax Laws: The Income Tax Act, 1961 governs the taxation of managerial remuneration in India.
- Tax Treatment of Different Types of Managerial Remuneration
Managerial remuneration is an essential component of corporate governance and plays a crucial role in attracting and retaining top talent. However, companies need to be aware of the tax implications of different types of managerial remuneration. The tax treatment of different types of managerial remuneration is governed by the Income Tax Act 1961. In this article, we will discuss the tax treatment of different types of managerial remuneration.
Fixed Remuneration: Fixed remuneration includes salaries, allowances, and other benefits that are paid regularly to the managerial personnel. The tax treatment of fixed remuneration is as follows:
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- Salaries: Salaries are fully taxable in the hands of the The employer is required to deduct tax at source (TDS) from the salary payments.
- Allowances: Allowances, such as house rent allowance, conveyance allowance, and medical allowance, are taxable based on certain conditions. If the allowances are used for their intended purposes, they are exempt from tax up to a certain limit. The excess amount is taxable.
- Other Benefits: Other benefits, such as provident fund, gratuity, and superannuation, are taxable in the hands of the recipient based on certain conditions.
Variable Remuneration: Variable remuneration includes bonuses, stock options, and other incentives that are paid based on the performance of the managerial personnel. The tax treatment of variable remuneration is as follows:
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- Bonuses: Bonuses are fully taxable in the hands of the The employer is required to deduct TDS from the bonus payments.
- Stock Options: Stock options are treated as a perquisite and are taxable in the hands of the recipient. The taxable amount is the difference between the fair market value of the shares on the date of exercise and the exercise price.
- Other Incentives: Other incentives, such as performance-based pay and profit-sharing, are taxable in the hands of the
Regulatory Provisions: Companies need to comply with various regulatory provisions related to the tax treatment of managerial remuneration. These provisions include:
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- TDS on Salaries: Employers are required to deduct TDS from the salary payments of the managerial personnel.
- Taxation of Perquisites: Companies need to calculate and report the value of perquisites, such as stock options and other benefits, in the employee’s Form 16.
- Taxation of Bonus: Employers need to deduct TDS from the bonus payments made to the managerial personnel.
Companies need to be aware of the tax implications of different types of managerial remuneration. The tax treatment of fixed and variable remuneration is governed by the Income Tax Act 1961. Companies need to comply with various regulatory provisions related to the tax treatment of managerial remuneration, such as TDS on salaries and taxation of perquisites and bonuses. Compliance with these provisions will help companies avoid penalties and build a strong corporate culture.
> Responsibilities of Auditors:
As per the Companies Act, the auditor of a company has certain responsibilities regarding the managerial remuneration. The following are the responsibilities of the auditor with respect to managerial remuneration:
- Audit of Financial Statements: The auditor should audit the financial statements of the company to ensure that the remuneration paid to directors and key managerial personnel is in compliance with the provisions of the Companies Act and the remuneration policy of the company.
- Verification of Disclosures: The auditor should verify the disclosures made by the company regarding the remuneration paid to directors and key managerial personnel in the board report and annual return.
- Reporting to the Audit Committee: The auditor should report any non-compliance or violation of the Companies Act or the remuneration policy to the Audit Committee of the
- Reporting to the Central Government: If the auditor finds any violation of the provisions of the Companies Act with respect to managerial remuneration, they are required to report the same to the Central Government within 30 days of noticing such violation.
Similarly, under the Income Tax Act, the auditor has certain responsibilities with respect to the payment of remuneration to directorsand key managerial personnel. The following are the responsibilities of the auditor under the Income Tax Act:
- Audit of Tax Returns: The auditor should audit the tax returns filed by the company to ensure that the remuneration paid to directors and key managerial personnel is in compliance with the provisions of the Income Tax Act.
- Verification of Disclosures: The auditor should verify the disclosures made by the company regarding the remuneration paid to directors and key managerial personnel in the tax returns.
- Reporting to the Income Tax Department: If the auditor finds any violation of the provisions of the Income Tax Act with respect to the payment of remuneration to directors and key managerial personnel, they are required to report the same to the Income Tax Department.
In summary, the auditor has the responsibility to audit the financial statements, verify disclosures, report to the Audit Committee and the Central Government (under the Companies Act) and audit the tax returns, verify disclosures, and report to the Income Tax Department (under the Income Tax Act) with respect to the payment of remuneration to directors and key managerial personnel.
> Conclusion:
Complying with managerial remuneration provisions is crucial for companies for several reasons:
- Legal Compliance: Companies are required to comply with the provisions related to managerial remuneration as per the Companies Act 2013. Non-compliance can lead to legal penalties and damage the company’s reputation.
- Fairness and Transparency: Compliance with the provisions ensures fairness and transparency in the remuneration paid to managerial personnel. This helps to build a culture of trust and accountability within the company.
- Investor Confidence: Compliance with the provisions of managerial remuneration can enhance investor confidence in the company’s governance structure. This can lead to increased investment and better access to capital markets.
- Attract and Retain Talent: Compliance with the provisions can help companies attract and retain top talent. This is because compliance ensures that the remuneration paid to the managerial personnel is competitive and in line with industry
- Employee Morale: Compliance with the provisions of managerial remuneration can enhance employee morale and motivation. This is because compliance ensures that the remuneration paid to the managerial personnel is fair and transparent, and that the company is committed to providing a safe and secure work environment for its employees.
In summary, compliance with managerial remuneration provisions is essential for companies to ensure legal compliance, fairness and transparency, enhance investor confidence, attract and retain top talent, and boost employee morale.
Author Bio
Good write up! It is often seen that the directors use company provided car for person purposes as well, but no perquisite is added to income, on the pretext that it is exclusively used for official purposes. In such case car log book needs to verified. Better to include perk value as per Income Tax Act.