Applicability of GST on Directors remuneration and liability to pay GST under RCM on Directors remuneration has always been a matter of dispute. Recently, Authority for Advance Ruling, Karnataka and the Authority for Advance Ruling, Rajasthan has determined that the company is liable to pay GST under RCM on remuneration paid to directors in capacity of employees.
Verdict was given in the case of M/S. ALCON CONSULTING ENGINEERS (INDIA) PVT. LTD. (No. KAR ADRG 83/2019 dated 25th September, 2019) by Authority for Advance Ruling, Karnataka and M/s IN RE: M/S. CLAY CRAFT INDIA PVT. LTD. (RAJ/AAR/2019-20/33 dated 20th February, 2020) by Authority for Advance Ruling, Rajasthan.
The Hon’ble AAR Rajasthan has determined that remuneration / considerations paid to directors by the company is liable to GST under Reverse Charge Mechanism under entry No. 6 of Notification No. 13/2017, Central Tax (rate) dated 28-06-2017.
Considering the various representations and increasing confusions due to advance ruling, Central Board of Indirect Taxes and Customs (“CBIC” or “Department”) issued circular No. 140/10/2020 – GST dated 10th June, 2020 to clarify applicability of GST on Directors remuneration.
Below are detailed analysis of the order passed by the honourable Authority of Advance Ruling and consequently circular issued by CBIC in the matter.
1. Advance Ruling on M/s Clay Crafts India Pvt Ltd
Many facts and arguments have been placed by both the authorities in the given case . Let’s have a look below to re-evaluate the actual situation of this context.
1.1 Brief Facts of The Case
- M/s Clay Crafts India Private Limited (“The Applicant”) is engaged in manufacture of bone China Crockery, Transfer Sheet Decalcomania, other Utensils Item and Moulds & Die.
- Applicant is having 6 directors in Board of Directors.
- Directors are performing all duties and responsibility set out in law. Simultaneously, directors are also working at different levels of management as employees for which they are getting regular salaries and other allowances as per the policies.
- Directors are considered at par with other employees of the company and company is also deducting TDS and EPF on their remuneration.
- In September, 2019, Authority for Advance Ruling in the matter of M/s Alcon Consulting Engineers (India) Pvt. Ltd that Directors’ remuneration is Liable to GST under RCM. Hon’ble Authority of Advance Ruling set down following points:
- Remuneration paid to the directors of the company is not covered under Schedule III of the CGST Act, 2017 as directors are not the employees of the company.
- Director is the supplier of the service and the company is the recipient of the service.
- As recipient (i.e. Company) is located in taxable territory and director’s remuneration is paid for services supplied by him to the company. Therefore, this service falls under heading No. 6 of Notification No. 13/2017 dated 28th June, 2017. Therefore, Company is liable to pay GST on the same under RCM.
- Petitioner is already paying GST under RCM on any commission paid to directors.
- Salary paid to directors is booked under “Income From Salary” by directors in their personal Income Tax Return.
Questions raised by The Petitioner on which Advance Ruling is Sought:
- Whether GST is payable under Reverse Charge Mechanism (RCM) on the director’s salary and other payments?
- What will be the applicability of GST if the director is also a part time director in any other company?
2. Relevant Legal Extract of CGST law to determine RCM on Directors remuneration
2.1 Section 7(2) of CGST Act, 2017
“(2) Notwithstanding anything contained in sub-section
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council,
shall be treated neither as a supply of goods nor a supply of services.”
2.2 Entry No. I to Schedule III of CGST Act, 2017
“1. Services by an employee to the employer in the course of or in relation to his employment.”
2.3 Entry No. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28th June, 2017:
“on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services”. The notification is issued under Section 9(3) of the CGST Act, 2017.
Entry 6 of the said Notification reads as under
|S. No.||Category of Supply of Services||Supplier of Services||Recipient Services of Services|
|6||Services supplied by a Director of a company or a body corporate to the said company or the body corporate||A director of a company or a body corporate||The company or a body corporate located in the taxable territory|
3. Why Salaries / remuneration to Directors should not be charged to GST under RCM
- Apart from being directors of the Board of Directors, Directors of petitioner are also working as whole time directors as an employee and treated as par with employees.
- Petitioner is deducting EPF from their salaries and all other benefits are granted to them as given to other employees.
- Directors working as whole time directors are de-facto employees of the company.
- Therefore, as per Entry No. 1 to Schedule III of CGST Act, 2017, payment made to them for salary is not liable to GST under RCM.
- Term Employee is not defined under CGST Act, 2017, therefore, contention has to be taken from following other sources:
Companies Act, 2013
- As per Section 2(94) of Companies Act, 2017, Directors include directors in employment of the company.
- Therefore, any director working as a whole time director is an employee of the company.
Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 & Employees Provident Fund Scheme, 1952
- Whole time directors are appointed by the Board of directors of the company and are given various responsibilities of the company. Therefore, they are qualified as employees of the company under both the acts.
Regional Director, E.S.I. .. vs Sarathi Lines (P) Ltd. on 29 January, 1997 (1998) ILLJ 28 Ker the Hon’ble High Court of Karnataka
- A director or managing director can have dual capacity of both agent as well as employee of the company.
- It all depends upon his work and the terms of his employment.
- An employee works under supervision or direct control of his employer.
- The Hon’ble Supreme Court held that the power of the Managing director had to be exercised within the terms and conditions prescribed in terms of employment and his work is subject to the control and supervision of the directors.
- Therefore, the director is employed as a servant of the company.
- Similar view was taken by Hon’ble supreme court in the matter of Ram Pershad vs Commissioner of Income-Tax, New … on 24 August, 1972 1973 AIR 637, 1973 SCR (3) 985.
- Memorandum of Association and Articles of Association of petitioner also permits for appointment of managing director for payment of remuneration in form of Salary.
- Accordingly, the applicant contended that conjoint reading of all above provisions makes it clear there exists an employer and employee relationship between the Board of Directors and Managing Directors.
- Therefore, all payment made to directors for salary and other allowances (travelling allowance, medical etc) are in the form of salary and therefore, is covered under entry No. 1 of Schedule III of CGST Act.
- Therefore, the Applicant has no liability to pay GST on the same under reverse Charge mechanism on salaries paid to director
4. Why Salaries / remuneration to Directors should be charged to GST under RCM
- Salary paid by the applicant to the directors is covered under Entry No. 1 of Schedule III of CGST Act, 2017 as the director is not the employee of the company.
- Supplier of the service is the director and recipient of the service is the company (as per section 2(93) of CGST Act, 2017) and consideration is paid by the applicant to the directors for such services.
- Entry No. 6 of N/No. 13/2017-Central Tax (rate) dated 28th June, 2017 levy GST on reverse charge if the recipient is the company/body corporate located in taxable territory, supplier of service is director of the company and consideration is paid for the services supplied by the directors.
- In the given case, the applicant is located in taxable territory and remuneration is paid to the directors for services provided by them to the company.
- Therefore, the applicant is liable to pay GST under RCM on remuneration paid to directors.
- Consideration in form of salary and commission is paid by the company to the directors for services supplied by directors. Company is the recipient of such service.
- Applicant is already paying GST under RCM on commission paid to the directors under Entry No. 6 of N/No 13/2017-Central tax (Rate) dated 28th June, 2017.
- Service supplied by directors to the company is specifically covered under entry No. 6. Consideration paid by the company to the directors is not covered under Entry No. 1 Schedule III of CGST Act, 2017 as directors are not employees of the company.
- Entry No. 6 of N/No. 13/2017-Central tax (rate) dated 28th June, 2017, creates a differentiation between services provided by directors and other services and specifically includes such service under RCM.
- Further, Case laws cited by the applicant are not relevant to the case and the case is required to be decided on the basis of existing provisions of CGST Law.
- Therefore, as the applicant company is located in taxable territory and the director’s consideration is paid for the services supplied by the director to the company. Therefore,same is liable to GST under RCM under entry No. 6
5. Decision Of The AAR in the case of
Question No. 1: Whether GST is payable under Reverse Charge Mechanism (RCM) the salary paid to the Director of the company who is paid salary as per contract.
Ruling: The consideration paid to the Directors by the applicant company will attract GST under RMC as it is covered under entry No. 6 of Notification No. 13/2017 Central Tax (Rate) dated 28.06.2017 issued under Section 9(3) of the CGST Act, 2017
Question No.2 :Whether the situation would change from (a) above if the Director also is a part time Director in another company also.
Ruling: Situation will remain same as (a) above and will attract GST under reverse charge mechanism.
6. Circular to clarify GST on Director Remuneration (Circular No. 140/10/2020 – GST dated 10th June, 2020)
Department received various representations to clarify that whether directors remuneration is covered under Entry No. 1 of Schedule III of CGST Act, 2017 or it is liable to tax under Reverse Charge Mechanism vide Entry No. 6 of N/No. 13/2017- Central Tax (Rates) dated 28th June, 2017.
Issue has been analysed by the department for following 2 category of Directors:
- Independent Directors (Referred to in Section 149(6) of Companies Act, 2013), who are not employees of the company.
- Whole time Directors and Managing Directors, who are employees of the company.
6.1 Remuneration to Independent Director would be charged to GST under RCM (Not as Employee of the company)
- Prerequisite for appointment of independent director, under section 149(6) of Companies Act, 2013, is that such director should not be an employee of the company in any of the 3 preceding financial years.
- Section section 2(94) of Companies Act, 2013 provides an inclusive definition of Whole Time Director. Therefore, a person who is not an employee of the company can be appointed as whole time director.
- Accordingly, remuneration paid to such directors, who are not an employee of the company, is outside the ambit of Entry No. 1 of Schedule III of CGST Act, 2017.
- Therefore, in terms of entry No. 6 of N/No. 13/2017-Central Tax (Rate), recipient of the service, i.e., company, is liable to pay GST on such remuneration under RCM.
6.2 Remuneration of Whole time director and Managing Directors would not be charged to GST under RCM (Employee of company)
- Department has clarified that to determine applicability of GST on director remuneration, it is pertinent to examine whether service is performed out of “Contract of service” (Employer-employee relationship) or “Contract for Service”.
- A director may work in dual capacity, i.e., as an employee and as director of the company.
- Similar position is also established under Income Tax Act, 1961, wherein, salary paid to directors is liable to TDS under section 192 (TDS on Salary). However, where remuneration is paid in nature of professional fee and not salary then TDS is deductible under section 194-J (TDS on Professional Fee)
- Therefore, payment made to directors, which is declared as “Salary” in books of accounts and on which TDS has been deducted under section 192 of Income Tax Act, are covered under entry No. 1 of Schedule III of CGST Act. Therefore, no GST is applicable on such payment.
- However, payment is recorded other than “Salary” in books of accounts of the company and which is subject to TDS under section 194J of Income Tax Act. Such payments falls under Entry No. 6 of N/No. 13/2017-Central tax (Rate) dated 28th June, 2017 and the company is liable to pay GST on such payment under RCM.
- Payment booked as “Salary” in books of accounts of the company and on which TDS is deducted u/s 192 of Income Tax Act, then, such payment is covered under schedule III of CGST Act, 2017 and no GST is applicable on such payment.
- Payment made other than “Salary” and TDS on which is deducted under section 194J of Income Tax Act, 1961, then, company is liable to pay GST on such payment under RCM.