Director Remuneration and GST

Goods and Service Tax brought out substantial changes to tax regime but faced many controversies. GST laws have created many confusions which lead to controversies later.

Directors remuneration was one of the non controversial subjects in the taxation regime. Two recent advance ruling made by two states like, Rajasthan and Karnataka created lot of confusion with regard to director remuneration and applicability of GST in such remuneration.

The issue in question was whether payments made by a company to its director will qualify as salary to an employee and accordingly not attract GST or it will be treated as business payment and will attract GST under reverse charge mechanism (RCM).

The issue gets complicated as there are different types of directors like Managing Director, Whole Time Director, Independent Director, Nominated Director, Additional Director, Alternate Director.

GST law clearly says that the supply of service by an employee to the employer will not be considered as supply not liable to tax as per schedule III of the CGST Act. Whole controversy started after the Notification number 13/2017 – Central Tax ( Rate ) dated 28th June 2017, as it says tax is to be paid under Reverse Charge Mechanism by the company on remuneration to a nonexecutive director.

In the case of Clay Crafts India Pvt Ltd, Rajasthan State made an Advance Ruling. In short the ruling was

--- The question of GST payable under Reverse charge mechanism on salary paid to director of company the authority ruled that the consideration paid to the directors by the company will attract GST as per the notification.

--- Another question was whether there will be a change if the director is part time director in another company, the authority ruled that the situation will remain same.

To the contrast, in the case of Anil Kumar Agarwal, Advance Ruling Authority of Karnataka ruled that the remuneration to Executive Director for his services to the company will not attract GST. But when the remuneration paid to a non executive director, it will be liable for GST.

When we closely monitor above two rulings, it is creates confusion. In the Rajasthan Advance Ruling, it was a blanket ruling but in the case of Karnataka Advance ruling remuneration to an executive director for his services, is exempt from GST, but to a non-executive director it is taxable.

To clear the air after above rulings, Central Board of Indirect Taxes and Customs (CBIC) issued a clarification on 10thJune 2020 wide circular No 140/10/2020.

This is was in continuation with the several references were also received from industry due to the confusion created by the above two rulings. The subject of reference were the application of GST on remuneration received by independent directors as per section 149 (6) of Companies Act or those directors who are not in employment. The remuneration paid to such directors are taxable in the hands of the company, o reverse charge basis.

On the other hand if the director is an employee of the company, means whole time, executive or managing director, no GST will be applied, the company can deduct TDS. Here the real test will be understand the activities performed by the director are in the course of employee – employer relation or the is there any element of contract of service. If there are any other incomes other than salaries in the company accounts and subjected to TDS under section 194J of IT Act as fees for professional and technical services shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and therefore taxable under reverse charge basis.

Example 1:

Mr. Ram is a Managing Director of Blue Ltd. and Central Ltd. who receives remuneration of Rs. 1,00,000/- per month from company Blue Ltd and Rs.75,000/- per month from Central Ltd.Company Blue Ltd records the payment in the books of accounts as salaries and deducts TDS under section 192 of Income tax Act, 1961 and whereas Central Ltd. records as Professional services and deducts TDS under 194J. Whether GST is applicable on the amount paid as Remuneration to Mr. Ram?

In the above case, it is clearly evident that there exists an employer – employee relationship (Contract of Service) of Mr Ram. with Blue Ltd, as the company accounts the remuneration as salary and also TDS is deducted under section 192 of IT act, 1961. In this case, this transaction falls under Schedule III of the CGST Act, 2017 and outside the scope of GST.

But in the case of Centra Ltd, there is an element of “contract for service”provided by Mr. Ram The activities provided are in the nature of professional services and also evident from the fact that TDS is deducted under section 194J of IT Act, 1961. This transaction attracts GST under Reverse charge mechanismand Central Ltd has to pay GST at the rate of 18%.