Clarification in respect of levy of GST on Director’s Remuneration

[Kapil saini]

Various AAR has been issued on director remuneration under GST.

• Let us overview of AAR in the case of Clay Craft India Pvt Ltd [2020 (4) TMI 228 - AUTHORITY FOR ADVANCE RULING RAJASTHAN]. The appellant submission which is as under: 

• Directors are also 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.
• Salary is regularly paid to the directors, TDS is also being deducted as applicable on salary u/s 192, Provident Fund and other benefit is also the same at par with other employees and as per company policy. Etc.

Despite above submission AAR has held that director is  not the employee of the company and the Consideration paid to director is covered under RCM as mentioned in entry 6 Notification 13/2017 Center Tax (R).

• Further overview of one more AAR IN RE: M/S. ALCON CONSULTING ENGINEERS (INDIA) PVT. LTD. [2019 (10) TMI 793 - AUTHORITY FOR ADVANCE RULING, KARNATAKA] wherein it has been held that the remuneration to the Directors paid by the applicant 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. 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 as per clause (93) of section 2 of the CGST Act and the supplier of such service is the Director. Hence, the company is liable for the payment of GST under RCM.

Now CBIC Issued a clarification in respect of of levy of GST on director remuneration vide Circular No: 140/10/2020 dated 10^th of June 2020.

It is examined by CBIC in the following two different categories:

1. livability 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
2. livability of GST on remuneration paid by companies to the whole-time directors including managing director who are employees of the said company.

Livability of GST on remuneration paid by companies to the independent directors or those directors who are not the employee of the said company.

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.

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 the said company.

Therefor the remuneration paid to said director is outside the scope of Schedule III of the CGST Act and are therefore taxable under entry 6 of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017.

Hence, the recipient of service provided by said director are liable to discharge on it under RCM.

Livability 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. Then the services provided by such director fall under Schedule III of the CGST Act.

Hence, remuneration paid to said director are taxable under GST.

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 Income Tax Act, 1961 are covered under Schedule III of the CGST Act, 2017.

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 outside the scope of Schedule III of the CGST Act, 2017, and is therefore, taxable under entry 6 of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient (i.e. the Company), is liable to discharge GST on it Under RCM.

Conclusion

If Remuneration of Said Director are subject to TDS under section of 192 of IT Act then the services provided by said director covered under Schedule III of the CGST Act, 2017 and not taxable under GST.

If Remuneration of said director are subject to TDS under section of 194J of IT Act, then the services provided by said director are covered under entry 6 of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017. and liable for GST under RCM.

Discussions to this article

[Alok Kumar]

Dear Kapil jee , You have correctly interpreted the CBIC circular so far as the intent of the circular is over.

But , I still doubt that the circular will settle the issue/matter.

Thanks,

Alok Kumar

[Alok Kumar]

Please read concerned in place of "cover".

[Ganeshan Kalyani]

The circular, however, gives some clarity enabling the taxpayer to assess his books wrt director's remuneration and decide on its taxability.