GST ON REMUNERATION PAID TO DIRECTORS

[Mr. M. GOVINDARAJAN]

A Company registered under the Companies Act, 1956/2013 is a legal entity its affairs are managed by the Board of Directors.  The Directors play a key role in the organization of a company.  The Companies Act, 2013 prescribes the minimum number of directors for a private company, public limited company, one person company and also the maximum number of directors that can be appointed.  Besides independent directors and small directs may also be appointed.  The Directors are of two groups viz., executive director and non executive director.  The executive director is the whole time director of the company who will take in charge of the company and control the entire affairs of the company.  Such directors are give remuneration and are treated as employees of the company. 

The Director may also be entitled commission, sitting fee for attending the board meeting etc.,  On introduction of service tax the taxability on such amount arised.  It has been held that the remuneration paid in the capacity of employee is not liable to service tax and other payments such as commission, fees etc., are under the service tax liability and the company is liable to pay service tax under reverse charge mechanism.

The provisions of  service tax are also continued in GST in many aspects.  In this regime also there is a doubt on the taxability on the remuneration paid to the Directors by the company.   In this article two advance rulings are discussed as detailed below-

In re ‘Alcon Consulting Engineers (India) Private Limited’ – 2019 (10)TMI 793 – AAR, Karnataka, the applicant  is in the business of providing Consultancy services, like surface survey and map making, Project management consultancy services for construction projects, Engineering Advisory services and technical testing analysis services etc. to the General Public, State Government Agencies, and Central Government throughout the country.  The applicant has sought advance ruling in respect of the following questions-

• Whether the expenses incurred by the Staff members on behalf of the Company exceeding ₹ 5000/-  a day and then reimbursed periodically are liable to tax?
• Whether RCM is applicable on remuneration paid to the Directors?

The applicant narrated the expenditures are like that of travelling allowance, Reimbursement of Transportation and Food Expenses, Vehicle Hire Charges, Machinery Hire Charges, Boarding and Lodging etc.,   The applicant stated that it was very difficult to monitor the same at regular intervals because their staff members are working at remote areas and there is no connectivity to reach or contact the office on a day to day basis or vice versa.

The Authority for Advance Ruling analyzed the provisions of Schedule III and the definition of ‘consideration’.  The Authority for Advance Ruling observed that-

• The amount reimbursed by the applicant to the employee later on would not amount to consideration for the supplies received as the services of the employee to his employer in the course of his employment is not a supply of goods or supply of services and hence the same is not liable to tax.    
• The services provided by the Directors to the Company are not covered under clause (1) of the Schedule III to the Central Goods and Services Tax Act, 2017 as the Director is not the employee of the Company. The consideration paid to the Director is in relation to the services provided by the Director to the Company and the recipient of such service is the Company.  This squarely falls under Sl. No. 6 of Notification No. 13/2017-Central Tax (Rate), dated 28.06.2017 which provides that the company, being the recipient of the services of the Director is liable to pay tax under reverse charge mechanism.
• The question before the Authority for Advance Ruling is not whether this service is taxable or not, but whether this supply of services is liable to tax under reverse charge mechanism.

The Authority for Advance Ruling held that the applicant is liable to pay tax under reverse charge mechanism on the services received by the Director for the second question referred to by the applicant.

In this application the applicant sought for advance ruling  on the taxability of the remuneration of the Directors.  The Authority for Advance Ruling, it seems, does not analyze the term ‘remuneration’ as to whether the said amount is paid to the Director by the company by virtue of his whole time employment in the company.  It is not known whether the applicant has failed to elaborate the same to the Authority for Advance Ruling.  But the Authority for Advance Ruling considered the question as if the applicant wants to know whether the applicant is liable to pay tax under RCM and answered accordingly.

In re ‘Clay Craft India Private Limited’ – 2020 (4) TMI       228 – AAR, Rajasthan,  the applicant is engaged in the manufacture of bone China Crockery, Transfer Sheet Decalcomania, other Utensils Item and Moulds & Die.  The applicant company has 6 directors.   The said Directors are performing all the duties and responsibilities and duties as required under the laws. However along with that these all directors are also working in the company at different level of management in the company and each one of them is holding charge of procurement of raw material, production, quality checks, dispatch, accounting etc. In other words, they are also working as an employee of the company for which they are being compensated by the company by way of regular salary and other allowances as per the company policy and as per their employment contract.

The applicant submitted the following before the Authority for Advance Ruling-

• The Directors are also working as an employee of the company for which they are compensated by the company by way of regular salary and other allowances as per the company policy and as per their employment contract.
• The Directors are treated at par with any other employee of the company as far as their employment is concerned. 
• The company is deducting TDS on their salary and PF laws are also applicable to their service.
•  Therefore, in all practical purposes these directors are the employees of the company and are working as such besides being Director of the company.
• The applicant is already paying GST under reverse charge mechanism on the on any commission paid to its Director as such amount pertain to the service provided by them in the capacity of a Director.
• The salary being paid to our Directors is being booked under “Income from Salary” by the Directors in their personal Income Tax returns.

The applicant also relied on some judgments in support to their contention that the Director, getting remuneration is an employee of the company.

The applicant sought for advance ruling on the following questions-

1. Whether GST is payable under Reverse Charge Mechanism (RCM) the salary paid to Director of the company who is paid salary as per contract.
2. Whether the situation would change from (a) above if the Director also is a part time Director in other company also.

The jurisdictional officer contended that the salary paid to the Directors by the Company, the services provided by the Directors to the Company are not covered under clause (1) of the Schedule III to the Central Goods and Services Tax Act, 2017 as the Director is not the employee of the Company. The consideration (salary) paid to the Director is in relation to the services provided by the Director to the Company and the recipient of such service is the Company as per clause (93) of section 2 of the CGST/RGST Act, 2017 and the supplier of such service is the Director.  Vide Sl. No. 6 of the Notification No. 13/2017-Central Tax (Rate), dated 28.06.2017 the applicant is liable to pay tax on reverse charge basis on the salary paid by the applicant to its Directors.

The Authority for Advance Ruling observed that-

• The consideration in form of salary and commission paid to the Directors by the company is against the services provided by them to the company and the company is recipient of such service and Directors are the supplier.
• The applicant is already paying GST by way of reverse charge mechanism on the commission paid to the Directors treating as such amount pertain to the service provided by them in the capacity of a Director.
• In the instant case question before us is whether the consideration paid to the Directors for providing services to the company is liable for GST under reverse charge mechanism vide Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017.
•  The consideration paid to the Director for the supply of services to the Company is specifically covered under Notification No. 13 /2017- Central Tax (Rate) dated 28.06.2017.

The Authority for Advance Ruling held that the consideration paid to the Directors by the applicant company will attract GST under reverse charge mechanism 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.

A common view is prevailing among the business group that the Authorities for Advance Ruling mostly favored the Revenue.  This case is not an exception to this.  The applicant elaborated its case in detail.  But the Authority for Advance Ruling has taken into account of the contentions of the jurisdictional officer only and held that the consideration paid to the Directors by the applicant company will attract under reverse charge mechanism.  The Authority for Advance Ruling has not placed any reasons for not considering the contentions of the applicant. 

The applicant may go in for appeal against the ruling given by the Authority for Advance Ruling before the Appellate Authority for Advance Ruling.

Discussions to this article

[OmPrakash jain]

Sir,

Kindly read detailed judicial analysis in as to why Directors be treated as employee of the company and what is the significance of entry of taxability of Directors remuneration specifically included in the notfn No13/2017-CT(R) dated 28.6.2017

[Ganeshan Kalyani]

The Advance ruling of M/s. Clay Craft = 2020 (4) TMI 228 - AUTHORITY FOR ADVANCE RULING RAJASTHAN will create more problem amongst taxpayers. The Authority has not given his backing and explanation as to why the remuneration paid to Director who controls the affairs of the company be taxable under GST. The Authority has referred and quoted the notification no. 13/2017-CT. And nothing more is submit to justify his contention and ruling. The ruling would create chaos. It must be set aside.

In my view, a Director who is a whole time employee of the company and is paid salary and some variable component basis his job performace and company performance would be covered under clause 1 of Sch III of CGST Act, 2017 and accordingly not liable to GST.

On the other hand the Director who is not looking after the affairs of the company and who is not appointed as an employee but provides consultation to the business would get covered under reverse charge notification.