Partners Share of Profit, Goods and Services Tax - GST

[Rachit Agarwal]

Whether Partners Share of Profit liable to GST?

Whether share of profit would faill within the ambit of salary just like the Commission paid to Whole Time/ Managing Directors as Companies Act.

Regarding the Partner's salary same would fall under Schedule III clarified vide FAQ Point No- 58 and Interest on Capital is exempted by virtue of Notification No- 12/2017 Central Tax Rate dated 28.06.2017

Posts / Replies

[Roshan Singh]

1. Partner share of profit is not liable to GST.
2. Yes, According to me share of profit would fall within the ambit of Salary.

For more clarification you can read the below statements:-

• On the basis of provisions of Partnership Act. It is settled that a partner is not ‘employee’ of the firm and salary is only share of profit.
• It has been clarified vide S Nos. 58 and 71 of Tweet FAQ released by CBEC on 26-6-2017, that GST is not payable on salary to partners.
• In my view, the answer is correct. Salary to partner is only share of profit in income tax- In CIT v. R M Chidambaram Pillai (1977) 106 ITR 292 (SC) = 1976 (11) TMI 2 - SUPREME COURT, it was held that a firm is not a 'legal person' though it has some attributes of personality. In income tax law, a firm is a unit of assessment, by special provisions, but is not a full person. Salary paid to partner is only profit known by a different name.
• In strict law, there cannot be a contract of service between a firm and one of its partners, since contract of employment requires two distinct persons viz. employer and employee. A man cannot be his own employer. Thus, salary to partner is only share of profit by different name. It is only supply money and hence not covered under GST as mere supply of money is neither goods nor services.
• Alternate argument that partner is employee due to deeming fiction - Though partnership firm is not ‘legal person’, by a legal fiction under GST Law, it has been defined as a ‘person’, notwithstanding provisions of Partnership Act. Thus, once a legal fiction is created by law, it has to be taken to its logical end. Once a deeming provision has been introduced, it has to be ‘deemed’ for all purposes for which the fiction was created. Hence, partnership firm and the partner have to be ‘deemed’ as two different persons and then a partner will be employee of the partnership firm. Since service provided by employee to employer is neither supply of goods nor supply of service as per clause 1 of Schedule III of CGST Act, GST cannot apply. It may be advisable to have proper agreement with partner for this purpose.
• Conclusion - In view of above and in view of departmental clarification, such share of profit is not taxable under GST.

[KASTURI SETHI]

Profit sharing agreement is an actionable claim and neither supply of goods nor supply of services covered under Schedule-III to CGST Act. Hence not taxable. AAR decision is reported as 2019 (27) GSTL.32 (AAR-GST) : Applicant : Venkataswamy Jagannathan = 2019 (7) TMI 1000 - AUTHORITY FOR ADVANCE RULING, TAMILNADU.

[Rachit Agarwal]

In AAR as it was transactions in securities where the person has agreed to sale the shares as specified price and thus has established the claim as some future date. Such claim was treated as actionable claim

Further share of profit of partnership firm is different from the share of profit as state in AAR. Partnership Share of Profit in my opinion cannot be treated as actionable claim.

Section 3 of the Transfer of Property Act, 1882 we reproduce the said relevant definition of the term “actionable claim”.

“ ‘Actionable Claim’ is a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in possession either actual or constructive, of the claimant, which the civil courts recognise as affording grounds of relief whether such debt or beneficial interest be existent, accruing or conditional or contingent”.

In one type of sharing of profit in Appellate Authority for Advance Ruling in case of United Breweries = 2018 (11) TMI 283 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA, the sharing of profit was treated as taxable supply and GST is chargeable theron.

[KASTURI SETHI]

Sh.Roshan Singh Ji,

We cannot take the help of Income Tax Act in GST matters. Income Tax is a direct tax and GST is an indirect tax. However, I agree with your views regarding non-applicability of GST on profit sharing. It is not in dispute that we find contradictory decisions of AAR on the same issue. I like your knowledge of law and drafting. From your reply, it can be inferred that 'profit' has been earned out of 'turnover' (defined under Section 2(112) of CGST Act) on which GST stands paid on account of the supply of goods or services or both.

[YAGAY andSUN]

Erstwhile Legal Position under Service Tax Laws (Finance Act, 1994)

Allahabad High Court: Payment made in revenue sharing deal exempt from service tax.

Current Legal Position under GST Laws:

It is settled that a partner is not 'employee' of the firm and salary is only share of profit. It has been clarified vide S Nos. 58 and 71 of Tweet FAQ released by CBEC on 26-6-2017, that GST is not payable on salary to partners.