CA Pooja Indani
As we all are aware that, when a person provides or agrees to provide a service for a consideration in a taxable territory then service tax is required to be paid.
As per Sec.66B of Finance Act, introduced w.e.f. 01.07.12 which is the new charging section undr Service Tax Provisions, Service ‘agreed to be provided is also taxable. legally, even entering into a contract for provision of service is a taxable event but, liability to pay the tax will be only on actual provision of service or amount received or invoice raised whichever is earlier, taxability event is given under Point Of Taxation Rules,2012 which is an another part of discussion.
Here, we are analyzing whether service provided by a director to company for a consideration in terms of salary, Remuneration, Sitting Fees, Commission,bonus etc. will be chargeable to ST?
Well the answer is in Dilemma. Before going into the taxability or non- taxability of Remuneration paid to directors, we will go through the sec.65B(44) of Finance Act,1994 as introduced w.e.f. 01.07.2012 read as follows-
“service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-
a) An activity which constitutes merely-i) a transfer of title in goods or immovable property,by way of sale,gift or in any other manner,ii) such transfer,delivery or supply of goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution or iii) a transaction in money or actionable cliam.
b) A provision of service by an employee to the employer in the course of or in relation to his employment.
c) Fees taken in any court or tribunal established under any law for the time being in force.
From the above Sec. 65B(44) Clause(b) is an important part for our consideration. In the said clause,it has been clearly stated, if there is an employer-employee relationship at the time of provision of service then it will not come under the ambit of word “Service” and hence, will not be chargeable to service tax.
So, whether relationship between a director & a company considered as employer-employee relationship?
Yes. it can be said that there is an employer-employee relationship among director and a company.,if a Director is managing director or a whole- time director or executive Director.
Because, In Notification No. 45/12 ST dt.07.08.12 ( amended) which has inserted clause 5A in para II in table i) after SI.NO. 5 it is said that, ST will be payable under RCM, in respect of services provided or agreed to be provided by a director of a co. to the said company.
Hence, it is nowhere mentioned in the notification whether it will be a Whole- time Director or non- whole time Director.
Therefore, sec.65B(44)(b) clarifies that, once there is employer-employee relationship, service tax will not be paid.
How to identify relationship among the director and company
Following are some of the circumstances through which one can decide the relationship among the director and company (list is only for illustration purpose,it may vary case to case)
1) Generally, whole-time/managing/executive directors are under a contractual employment. That means if it is clearly mentioned in the board resolution of company that whole-time director will receive salary/bonus for services rendered by them,then in obvious case it will not be considered as service and hence question of taxability under RCM does not arise.
2) In case of any other directors i.e., non-whole time director or non-executive director there may be an employer-employee relationship among directors & co. & it can be decided from the work of director and agreement by company.
But, generally non-executive directors are not employees of the company and hence any kind of amount received by them as in remuneration, sitting fees, commission etc.will be chargeable to tax under RCM.
3) If company is deducting TDS u/s 192 of Income Tax Act,1962 for making salary payment to directors and issuing Form-16 to its director ,then again no service tax is required to be paid.
4) As per the Maharashtra State Tax on Professions,trades,callings &Employment Act,1975, every employer is required to deduct Professional Tax on the salary & wage amount paid to employee.the act provides limits and rate of tax upto which tax can be dedected.
5) Schedule of rates of tax on professions, trades, callings and employments1
|Class of Persons||Rate of Tax
|Salary and wages earner. Such person whose monthly salaries or wages:
|Do not exceed Rs. 5,000
|Exceed Rs. 5,000 but not exceed Rs. 10,000
||Rs. 175 per month
|Exceed Rs. 10,000
||Rs. 2500 per annum to be paid in the following manner.
a) Rs. 200 per month except for the month of February
b) Rs. 300 for month of February
In normal case, director draws the remuneration more than the amount prescribed in above schedule and hence company bound to deduct PT & this is an very much clear proof for non-payment of service tax on amount received by directors from company. It is an sufficient statutory evidence to prove the employer-employee relationship.
6. In many cases it was so happened that, company giving salary to directors, but not making any contribution towards PF as per the provisions of respective Act, then due to non-contribution for PF will be be considered that there is no employer-employee relationship?? As an author my point of view is, just because company has not deducted PF amount from salary does not conclude that there is no employer-employee relationship .here again agreement among company and director must given a consideration. If it is clearly stated in the agreement regarding relationship among company and director then no need to pay the service tax.
Mode of payment will not alter the nature of service:-
As long as there is an employer-employee relationship, mode of payment will not alter the nature of service provided by a director.
For eg:- if company is offering options, shares, debentures of company in lieu of salary for services rendered by director then also it will not taxable if there is an employer-employee relationship.
Circular No. 115/096/09 ST dt.31.7.09 has also clarified to the department officials that mode of payment to directors will not alter the employer-employee relationship. This clarification would apply even under the new provision w.e.f.01.07.12.
Disclaimer:- The views expressed in the above article are altogether personal of the author and nothing is copied or reproduced from any other document except the relevant provisions of law and notification. Readers are advised to consult the relevant provisions of law before coming to any conclusion. The author will not be responsible for any financial loss to the reader.