Directors remuneration
Applicability of payment of GST under reverse charge on Director’s remuneration arising in the wake of Advance Ruling in the case of M/s Clay Craft India Private Limited.
In the erstwhile Service Tax regime, notification no. 30/2012-ST dated 20.06.2012 was amended by Notification no 45/2012-ST dated 07.08.2012 which read as follows:
“5A-in respect of services provided or agreed to be provided by a director of a company to the said company”
Further, a Circular no. 115/09/2019-ST dated 31.07.2009 was also issued by CBIC whereby it was clarified in para 3 that remuneration paid to Managing Director/Directors of Companies whether whole-time or independent when being compensated for their performance as Managing Director/Directors would not be liable to service tax.
Under the GST regime, at serial no. 6 of Notification no. 13/2017-CT(R) dated 28.06.2017 the following entry was made:
“Services supplied by a director of a company or a body corporate to the said company or the body corporate”
Vide this entry the company or a body corporate located in the taxable territory was made liable to pay GST on reverse charge basis on services supplied by a director.
In the above background, it is important to note that there can be various services which can be provided by the Director to the company and the payment is made by the company. Some examples are as under:
Directors remuneration
Renting of immovable property
Commission on certain transactions
Sitting fee
Independent professional/advisory fee
In the case of M/s Clay Craft India Pvt. Ltd., all the Directors were performing the duties and responsibility required under the Laws. All the Directors were also working in the company at different level of management in the company such as procurement of raw material, production, quality checks, dispatch, accounting etc. M/s Clay Craft India Pvt. Ltd. filed an application in the wake of decisions by the Authority of Advance Ruling, Karnataka in the case of M/s Alcon Consulting Engineers (India) Pvt. Ltd. wherein, it was ruled that the services provided by the Directors to the company are not covered under Clause (i) of the Schedule III to the CGST Act, 2017 as the director is not the employee of the company.
M/s Clay Craft India Pvt. Ltd. was already paying GST under reverse charge on the commission paid to their Director. Regarding payment of salary to their directors the same was being booked under “Income from salary” by their Directors in their personal Income Tax returns.
M/s Clay Craft India Pvt. Ltd. filed an application under advance ruling about the applicability of reverse charge mechanism on the salary paid to Directors who were working as employee and were being treated as employee at par with other employees. The company was deducting the EPF from their salaries and all other policies and benefits to them were given as per the policy decided by the company for their employees. On the below two questions the advance ruling was sought:
Whether GST is payable under reverse charge on the salary paid to Director of the company who is paid salary as per contract.
Whether the situation would charge from (a) above if the Director also is a part time Director in other company also.
The Authority held that the consideration paid to the Directors will attract GST under reverse charge mechanism as it is covered under entry no. 6 of Notification no. 13/2017-CT(R) dated 28.06.2017 and also of part time Director working in other company.
In both these advance ruling, a very important aspect has not been considered by Authorities is “whether the director of company is employee or not?”
The services provided by an employee to the employer in the course or in relation to his employment are not treated as “supply” as per Schedule III to CGST Act, 2017.Further, under Income Tax Law, the Director’s remuneration is also taxed as income under the head “Salary” and company also issued Form-16 to the Director. There are different kinds of directors that a company can appoint. Broadly they can be divided into two categories – executive directors and non- executive directors. Executive directors are the ones who basically are involved in the day to day execution of the affairs of the Company and include whole time directors, managing directors, etc. whereas non-executive directors include independent director, nominee director etc. The executive directors of a company receive remuneration and are in full time employment of the company.
The non-executive directors are generally the ones who are professionally involved merely in broad business of the Company and do not involve into the day to day activities. These non-executive directors attend the board meetings and receive sitting fees or commission for providing services to the company or body corporate. The Companies Act, 2013 has defined the term “whole time director” under section 2(94) of the Companies Act, 2013 as follows:
(94) “whole-time director” includes a director in the whole-time employment of the company’
It is evident from the definition that the words used are “whole-time employment of the company” and the said words used clarify the intention of law that the whole-time directors are the persons who devote their whole time in management of the company.
Under the Companies Act, a General Circular No. 24/2012 dated 09.08.2012 issued by Ministry of Corporate Affairs (MCA) clarified that
“The Non-Whole Time Directors of the company are presently not covered under the exempted list and as such, the sitting fees/commission payable to them is liable to Service Tax. Service tax is payable on the commission/sitting fees payable to Non-Whole Time Directors of the company.”
It is evident from the above circular issued by MCA that even under the service tax regime, service tax was payable only on any commission or sitting fees paid to Non-Whole Time Directors. The exclusion of Whole-time Directors and Managing Directors in the above circular clarifies the intention of legislature that the said directors are employees of the company and activities carried out by them cannot be termed as service and made liable to service tax. Extending such arguments to the provisions of GST law, similarly the same should not be made liable for payment of GST. On comparison of the languages of the services in Service Tax regime as well as in GST regime, both are identical as mentioned in paras 1 and 2 above. The circular dated 31.07.2009 issued by CBIC during the Service Tax regime can be said to be applicable even in GST regime and no diversion from the clarification given by the CBIC needs to be made. Though the advance rulings have stated that GST is applicable even on the salary of a whole time Director but it appears that the clarification issued by CBIC have not been brought to the notice of the authorities.
Therefore, in our considered view where the Directors are working in the capacity of the employees of the company and the remuneration so paid shall be governed by Clause I of Schedule III of the CGST Act and no GST shall be payable on reverse charge mechanism. In case Director’s provide service in capacity other than employee like acting as a consultant or charging rent for office space will fall within the scope of supply and GST is levied accordingly.
The authorities in future may demand tax in view of the aforementioned rulings but the same can be defended in view of the observations made afore. It is pertinent to mention that in terms of Section 103 of the CGST Act, 2017 the advance ruling pronounced by the Authority shall be binding on the applicant and their distinct persons and the concerned officer or the jurisdictional officer in respect of the applicant.