Service tax liability for the Director's remuneration now on the companies.

[Meenu Garg]

All the companies are required to pay service tax under reverse charge on any remuneration paid to its directors whether in the form of money or otherwise and  thresh hold limit of Rs. 10 lakhs will not be applicable on such case.

As per the amended Notification No. 30/2012-ST dated 20.06.2012, the service provided by a director as a service to the Company which is leviable to Service Tax has to be paid by the service receiver. The extent of service tax payable by the recipient is 100%.

In other words the Directors of a Company are liable to Service Tax, but the same will be paid by the company.

Service tax will be additional cost to the company and company may require taking an approval to accommodate service tax within the ceiling of overall Directors’ remuneration. Since as per Section 309 of the Companies Act, the remuneration paid to Directors cannot exceed the limit of 1% profit of the company when the company has a Managing / Whole Time Directors / Managers or 3% of the profit of the company if the company does not have a Managing / Whole Time Directors/ Managers, as the case may be. The Company can pay remuneration at a rate exceeding one percent or, as the case may be, three per cent of its net profits, with the approval of the Central Government. 

But The Ministry of Corporate Affairs has clarified that if the Service Tax is paid by the Company, it will be deemed to be a part of the remuneration and would increase the amount of remuneration. And thus any increase in remuneration of Non-Whole Time Directors solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under section 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit of the company, as the case may be, in the financial year 2012-13.

For a trading company service tax so paid as recipient of service, will be cost to the company and for the For non-trading company service tax so paid may be available as credit if it qualifies as eligible input service.

The said amendment has been brought by the Notification No.44/2012 - ST dated 07.08.2012 So now in the absence of mention of any date in the notification, it shall be effective from the date of publication in official gazette i.e. 7th August, 2012. For services provided between1st July, 2012 to 6th August, 2012, directors will be liable to charge service tax since  there was no reverse charge mechanism for the said case by then.

Discussions to this article

[DEV KUMAR KOTHARI]

Remuneration paid to directors in capacity of employees of company shall not be subject to service tax. therefore, terms and conditions and facts of case vis a vis each payment to director or provision of facility to director etc.  need to be examined.

Exemption  to small service receivers is also desirable. Otherwise many entities will be liable to pay service tax  of very petty sums. This is becuase we have large number of companeis and firms who receive  services on which very insignificant amount of  services tax will be  payable. All such small service receivers should be exempted from getting registered, filing returns and paying service tax, becasue there is no use in increasing work load without significant gain of revenue.

Exemption limit also need to be increased to at least Rs. twenty lakh-five in view of hyper inflation which we have faced during last many years.

A notificaiton granting exemption  to all service providers and service receivers is desirable.

[P S SATYA NARAYANA]

The purpose of avoiding Directors to register themselves under Service Tax and keep books of accounts has been defeated with the Notification No.45/7.8.2012 as now Directors' have to register under Service Tax for 37 days i.e.from 1.7.2012 to 6.8.2012.  As we all aware most of our Directors are old, retd officials etc and asking  them to register and pay service tax for the above short period is absurd.  The Govt should make this Notificatiion with retrospective effect i.e. 1.7.2012

[A J DEORA & ASSOCIATES]

How does reverse charge work when Director is rendering service in a Propreitory trade name?