GST on Director’s remuneration is a much disputed matter in the latest because of some Advance Rulings issued by various authorities. Some authorities had ordered that remuneration paid to any director in whatever manner (salary/sitting fee) is liable for GST.
However, these orders have to face huge criticism from high profile professionals, tax experts and was criticised over various social media platforms. Also, various references and representations were made to CBIC to clarify the matter.
In this regard, CBIC comes out with a clarificatory circular on 10th June 2020. The circular has covered all type of directors and manner of payments to resolve the matter for public at large. In this article, we will discuss the issues and the circular (i.e. Circular No. CIR-140/10/2020-GST) resolving the issues.
Actually, Director’s remuneration is listed under Reverse Charge Mechanism notification (entry at Sl. No. 6 of the Table annexed to notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017).
As per this notification, GST on payment of remuneration to Director shall be paid by the company paying such remuneration. However, in this notification, meaning of remuneration has not been defined.
Whereas, Schedule – III of CGST Act provides that there is no GST on services provided by employee to its employer in the course of or in relation to his employment.
Because of two propositions, some companies approach the Advance Ruling authorities to clarify the matter at personal level. In some of these cases, authorities ruled out that every type of remuneration by whatever name called whether as salary, commission, professional fee, sitting fee, etc., are liable for GST under Reverse Charge. In these rulings, Schedule-III exception was ignored.
As the rulings issued by Advance ruling authorities, sometimes referred by GST department in other cases, the matter become disputed in various cases at various levels.
As the matter becomes disputive at various levels, Central Board of Indirect Taxes (CBIC) brought the circular to provide resolution over the issue. The circular says that:
The issue of remuneration to directors has been categorised in following two different categories:
- leviability of GST on remuneration paid by companies to the independent directors defined in terms of section 149(6) of the Companies Act, 2013 or those directors who are not the employees of the said company; and
- leviability of GST on remuneration paid by companies to the whole-time directors including managing director who are employees of the said company.
Leviability of GST on remuneration paid by companies to the independent directors or those directors who are not the employee of the said company
The primary issue to be decided is whether or not a “Director” is an employee of the company. In this regard, from the perusal of the relevant provisions of the Companies Act, 2013, it can be inferred that:
a. the definition of a whole time-director under section 2(94) of the Companies Act, 2013 is an inclusive definition, and thus he may be a person who is not an employee of the company.
b. the definition of “independent directors” under section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it amply clear that such director should not have been an employee or proprietor or a partner of the said company, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.
Therefore, in respect of such directors who are not the employees of the said company, the services provided by them to the Company, in lieu of remuneration as the consideration for the said services, are clearly outside the scope of Schedule III of the CGST Act and are therefore taxable. In terms of entry at Sl. No. 6 of the Table annexed to notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.
Accordingly, it is hereby clarified that the remuneration paid to such independent directors, or those directors, by whatever name called, who are not employees of the said company, is taxable in hands of the company, on reverse charge basis.
Leviability of GST on remuneration paid by companies to the directors, who are also an employee of the said company
Once, it has been ascertained whether a director, irrespective of name and designation, is an employee, it would be pertinent to examine whether all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service”) or is there any element of “contract for service”.
The issue has been deliberated by various courts and it has been held that a director who has also taken an employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other on the basis of the contractual relationship of master and servant with the company, i.e. under a contract of service (employment) entered into with the company.
It is also pertinent to note that similar identification and treatment of the Director‟s remuneration is also present in the Income Tax Act, 1961 wherein the salaries paid to directors are subject to Tax Deducted at Source (‘TDS’) under Section 192 of the Income Tax Act, 1961 (‘IT Act’). However, in cases where the remuneration is in the nature of professional fees and not salary, the same is liable for deduction under Section 194J of the IT Act.
Accordingly, it is clarified that the part of Director’s remuneration which are declared as “Salaries” in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.
It is further clarified that the part of employee Director’s remuneration which is declared separately other than “salaries” in the Company’s accounts and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable. Further, in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.
Any amount paid as salary and treated same under Income Tax Act shall not be liable to GST.
Other than salary, whatever amount by whatever name called for, shall be liable for GST under Reverse Charge.