GST on Directors' remuneration

Schedule-III to CGST Act, 2017 provides that services by an employee to the employer in the course of or in relation to his employment are neither a supply of goods nor a supply of services.

Further, Serial no. 6 of Notification No. 13/2017- Central Tax dated 28.06.2017, provides that where the services are supplied by a director of a company or a body corporate to the said company or the body corporate, such services are liable to tax under reverse charge.

These two provisions have created a controversy regarding taxability of Directors’ Remuneration under GST regime. So we will throw a light on this issue in accordance with recent advance rulings and circulars.

Taxability of remuneration in Pre-GST regime:

• In service tax regime, service tax was payable on directors remuneration under reverse charge. Where a director renders services to the company, the company was subjected to pay service tax under RCM.
• Circular No. 115/09/2009- ST states that remunerations paid to Managing Director of companies whether whole-time or independent when being compensated for their performance as Managing Director would not be liable for service tax. Any other compensation to directors for their services shall be chargeable to service tax.

Taxability under Income Tax Act:

• Under Income Tax Act, 1961, any remuneration paid to directors is subjected to TDS under section 192 of the Act.
• Section-192 deals with deduction of TDS where the payment is made in the form of “Salary”.
• Thus, for the purpose of Income Tax Act, Remuneration paid by the company to directors is shown under the head “Income from Salary” while ITR efiling of director, considering the director as an employee for the company.

Thus, looking to above position, one view comes that directors stand in the position of employee for a company. Therefore, services provided by a director to the company shall neither be a supply of goods nor supply of services in accordance with Schedule-III to the CGST Act. However, Notification No. 13/2017 made the situation worse by advocating tax under reverse charge on services provided by a director to the company, leading to this controversy.

There are 2 advance rulings in this regard which are discussed below:-

M/s Alcon Consulting Engineers (India) Pvt. Limited AR No. KAR ADRG 83/2019

It is held that the remuneration paid to the director by the company are not covered under clause-1 of the Schedule-III to the CGST Act, 2017 as the director is not the employee of the company. As such, consideration paid to the director in relation to the services provided by the director to the company shall be liable to reverse charge under GST.

M/s Clay Craft India Private Limited AR No. RAJ/AAR/2019-20/33

In this matter, the appellant submitted that the directors are working apart from working as Board of Directors in the company at different level like procurement of raw material production, quality checks, dispatch, accounting etc. They are working as an employee of the company and salary is paid to them on which TDS is deducted as applicable on salary u/s 192 and other employee retirement benefits like other employees.

However, AAR held that consideration paid to the directors against the supply of services provided by them to the company are not covered under clause (1) of the Schedule-III to the CGST Act, 2017 as the directors are not the employee of the company. So, it is very clear that the services rendered by the directors to the company for which consideration is paid to them in any head is liable to pay GST under reverse charge.

These advance rulings created adverse situations for the tax payers and needed a clarification from the department. To settle this, CBIC has issued a circular clarifying the taxability of directors’ remuneration. A circular has been issued referred 140/10/2020-GST dated 10th June 2020 which is discussed as below:

The circular examines the issue in 2 parts:-

• 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 tha

1. 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.
2. 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.

To Summarize:-

• It is important to test “Employer-Employee” relationship for deciding taxability of directors’ remuneration. If a director is working in capacity of whole time director or managing director and deriving consideration from the company in form of “Salary”, such consideration shall not be subject to levy under GST.

• Apart from above, any other remuneration received by any director (whether independent director or otherwise) for any services rendered by them to the company not treated as “salary”, shall be liable for GST under reverse charge mechanism in the GST returns filed.

You may refer the detailed circular at: https://www.cbic.gov.in/resources//htdocs-cbec/gst/Circular_Refund_140_10_2020.pdf