Recently Rajasthan Authority of Advance Ruling in case of Clay Craft India Pvt Ltd has given ruling that, GST is payable under RCM, on Salary paid to director. [ Advance Ruling No RAJ /AAR/2019-20/33 dated 20th Feb 2020].
Said Ruling is pronounced in terms of, Entry 6 of Notification No 13/2017 CT dated 28.06.2017, as per which, on service provided by Director of company/Body Corporate, to the said company/body corporate, recipient of service ( that is company/body corporate) is required to pay GST.
Must watch video on Reverse Charge Mechanism under GST
Also, Karnataka Authority of Advance Ruling in case of Alcon Consulting Engineers (I) Pvt. Ltd. has ruled that “The remuneration paid to the Director of the Applicant company is liable to tax under reverse charge mechanism under Sec 9(3) of CGST Act 2017, read with Entry No. 6 of Notification No. 13/2017-Central Tax (Rate), dated 28-6-2017. [Advance Ruling No KAR ADRG 83/2019 dated 25th Sep 2019]
Both of these rulings have created chaos in the minds of all companies, Directors, and Management of companies, especially due to recent ruling in the case of Clay Craft India Pvt. Ltd.
Let's understand, governing provisions and are ruling in line with provisions and intent of the law.
Analysis Of Issue:
Levy Under GST And Reverse Charge: Levy provisions under GST are defined by Sec 9 of the CGST Act 2017. Sec 9(1) deals with levy under Forward charge, in which GST is payable by the supplier, whereas Sec 9(3) and Sec 9(4) deals with reverse charge, where GST is payable by receiver of service and not by supplier. Under reverse charge, recipient partakes the role of supplier and is required to do all GST compliance including payment of GST.
Sec 9(3) of CGST Act 2017 - The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both. The tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both
Sec 2(98) of CGST Act 2017 - Reverse charge means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax Act
Notification No 13/2017 CT Rate dated 28th June 2017 issued under Sec 9(3), to list down the services on the supply of which, GST is payable under reverse charge by the recipient. One of the services defined in the said notification is services by the director to the company.
Entry No 6 of Notification No 13/2017 CT Rate dated 28th June 2017: GST under Reverse charge will be payable for services of director as per below
Sr. No | Category of Supply of Service | Supplier of Service | Recipient of Service |
|---|---|---|---|
1 | Services supplied by a director of a company or a body corporate to the said company or the body corporate. | A director of a company or a body corporate | The company or a body corporate located in the taxable territory. |
Activities Which Are No Supply Under Schedule III:
On the apparent reading of the above entry, it implies that on all consideration paid to the director against his services GST is payable under RCM. However, it is important to consider other provisions.
Under GST, unless and until the activity is treated as Supply, it cannot be brought under the ambit of the levy. As per Sec 7, supply is defined to include ‘all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business and includes activity specified under Schedule I, even if without consideration’. Once the activity is considered as Supply, then it can be brought under the ambit of levy, under Sec 9 of CGST Act.
However, Schedule III read with Sec 7(2) of CGST Act 2017 lists down the activities which are no supply, which means GST cannot be levied on it. One of the activities covered under Schedule III is, ‘services provided by the employee to the employer in the course of employment’. Said activity is out of the purview of GST.
Sec 7(2) of CGST Act 2017 - Notwithstanding anything contained in sub-section (1),–– (a) activities or transactions specified in Schedule III; or (b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services
Schedule III - Activities or transactions which shall be treated neither as a supply of goods nor a supply of services 1.Services by an employee to the employer in the course of or in relation to his employment.
Accordingly, if any services are provided by an employee to the employer in the course of employment, GST won’t be attracted to it under Forward Charge & neither under Reverse Charge.
However, when any services are provided by an employee, which is outside the contract of employment can be liable to GST, as it will not be covered under Schedule III.
Is Director Employee Of Company?
Now the question arises, is the director an employee of the company? In general, the director has been paid remuneration as Salary, for his services to the company. Sometimes a commission is also paid, sitting fees, Professional fees are also paid for his services.
Let us evaluate, whether the director is an employee as well, in order to fall under Schedule III, on the basis of - definitions under other statues, Principal of Trade Parlance and Judicial Discipline available
Definitions Under Other Statues
Term employee and the director is not defined under CGST Act 2017 nor in rules. Therefore one needs to borrow its meaning from other statues.
The Principal of Trade Parlance
In common parlance, Managing Director or Whole Time Director is treated as Employee of the company and they have been offered with all benefits as are available to another employee like PF, insurance, etc. Their salary is paid on a monthly basis.
Also, companies deduct Income Tax TDS, for remuneration paid to the director under Section 192 of Income Tax Act, which deals with provisions of TDS on Salaries.
Also as per generally followed and accepted practice, the director discloses, remuneration received from companies under the head, income from salaries while filing ITR.
Therefore due to the above practice trade practice followed, the whole time Director / Managing Director is de facto employee of the company.
Judicial Discipline
Circular No. 115/9/2009-S.T., dated 31-7-2009
Service Tax Era, the government has clarified various aspects of payment to the director. Even though, service tax is not applicable currently, but the said circular is torchbearer and points clarified by will throw light on said subject. Circular clarified that, -
Therefore based on the above, it can be concluded that the director can also be an employee along with occupying the chair of the director. He is also strictly monitored by board of directors and can be fired if found inefficient in his duties.
Person who is engaged to manage a business can be an employee/servant or agent. The degree of control over employee/servant is higher than an agent. If there exist, employer-employee relationship, then the director can be termed as an employee, based on duties he performed and controls exercised by the company/board of directors over the director
So position of director doesn’t vacate or remove him from position of employment, as long as, there exist the employer-employee relationship However, it is suggested to have employment contract for director as well, to whom salaries are paid , which will also list down his employment details, duties and responsibilities.
Is Advance Ruling Applicable To All?
Ruling is always applicant specific. That is applicable to those who have applied it. As per Sec 103 of CGST Act 2017, the advance ruling is pronounced in case of a particular applicant, is applicable only in case of an applicant who has applied for it and his jurisdictional officer.
It cannot be made applicable generally. Even though facts of the case are similar in any of advance ruling with the situation faced by other taxpayers, it doesn’t have a binding impact for other taxpayers and he can’t take as defensive tactics in a litigation matter.
Two Advance ruling referred to in the first para of the article (AAR in case of Clay Craft India Pvt. Ltd and Alcon Consulting Engineers (I) Pvt. Ltd ), even though on equal footing and issue, but it has erred in its ruling. Authorities have not considered the intention of GST Law on salary/employer-employee relations. Authority has neither considered an explanation submitted by the applicant in the application nor, has given any reasonable explanation for rejecting various submissions made by the applicant.
Flow Chart of Applicability of GST on Payments to Director
Conclusion
Therefore essence to determine the applicability of payments to the director is the nature of the relation.
Remuneration paid to MD/WTD will be mostly in the nature of salary. When payment is made in terms of the employee-employer relationship, it will be covered under the 1st Entry of Schedule III and no GST implication.
If payment is made for any other reason/contract, then it will be covered under Notification 13/2017 CT Rate and GST is required to be paid under RCM by company.
It is suggested to have an employment contract copy on the place for salary paid to the director so that to avoid any future dispute in this regard.
Rajasthan Authority of Advance Ruling in case of Clay Craft India Pvt Ltd has not considered all provisions of law and erred in its ruling.
We hope that the Government should clarify this issue, so as to avoid unnecessary disputes, causing disturbance to management bodies.
This article is only for educational purposes. For any clarification, you may contact the author on: info@gst-at.com| +91 8888 343 343.