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GST-On-Director-Remuneration-Analysis-of-Issue

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.

GST on Director

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.

  • Sec 2(94) of Companies Act 2013 - Whole-time director includes a director in the whole-time employment of the company
  • Rule 2(k) of Companies (Specification of definitions details) Rules, 2014 - “Executive Director” means a whole-time director as defined in clause (94) of section 2 of the Act
  • As per Black’s Law Dictionary, the term Employee means, a person employed. This word "is from the French, but has become somewhat naturalized in our language. Strictly and etymologically, it means `a person employed,' but, in practice in the French language, it ordinarily is used to signify a person in some official employment, and as generally used with us, though perhaps not confined to any official employment, it is understood to mean some permanent employment or position." The word may be more extensive than "clerk" or "officer," and may signify anyone in the place, or having charge or using a function, as well as one in office. Hopkins v. Cromwell, 89 App. Div. 481, 85 N.Y.S. 839.
  • Sec 2(54) of Companies Act 2013 ―Managing director means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called

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

  • The provisions of RCM with respect to ‘services by director’ under GST is exactly the same as per provisions of service tax. In-Service Tax Era, In case of, M/s Allied Blenders and Distillers Pvt. Ltd. Vs. Commissioner of Central Excise, Custom and Service Tax, Hon'ble Mumbai Tribunal has allowed the appeal and held that GST under RCM will be not applicable on Remuneration paid to a director who is an employee of the company. [2019 (1) TM 433 CESTAT MUMBAI]. Hon’ble Tribunal in its finding mentioned that “Every power which is given to Managing Director, therefore emanates from the articles of association which prescribes the limits of the exercise of the power. The powers of the assessee have to be exercised within the terms and limitations prescribed thereunder and subject to the control and supervisions of the Directors which in our view is indicative of his being employed as a servant of the company (emphasis supplied)”
  • Hon’ble Mumbai CESTAT in case of RENT WORKS INDIA PVT. LTD. Versus COMMISSIONER OF C. EX., MUMBAI-V [ 2016(04)LCX0103 ] has held that – ‘’As Income Tax Department has considered this amount paid by the appellant to Service provider as a salary in adjudication proceedings, the service tax department of Government of India cannot take a different stand on the amount paid to the very same person and treat it differently. Salary paid to the director is not to be considered as to fall under the category of 'Management Consultancy Services'. Demand for Service tax is not sustainable. Appeal allowed”
  • Hon’ble Apex Court in case of, Employees' State Insurance Corporation Vs Apex Engineering Pvt. Ltd [ 1998 (1) SCT 63 (SC) ], has held that, as per terms of appointment and work entrusted, Managing Director is also an employee of the company

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, -

  • Some Companies make payments to Managing Directors/Directors (Whole-time or Independent), terming the same -as ‘Commissions’. The said amount paid by a company to their Managing Director/Directors (Whole-time or Independent) even if termed as commission, is not the ‘commission’ that is within the scope of business auxiliary service and hence service tax would not be levied on such amount.
  • The Managing Director/Directors (Whole-time or Independent) being part of the Board of Directors perform management function and they do not perform consultancy or advisory functions. The definition of management consultant service makes it clear that what is envisaged from a consultant is advisory service and not the actual performance of the management function. The payments made by Companies, to Directors cannot be termed as payments for providing management consultancy service. Therefore, it is clarified that the amount paid to Directors (Whole-time or Independent) is not chargeable to service tax under the category ‘Management Consultancy service’. However, in case such directors provide any advice or consultancy to the company, for which they are being compensated separately, such service would become chargeable to service tax.
  • In view of the above, it is clarified that remunerations paid to Managing Directors/Directors of companies whether whole-time or independent when being compensated for their performance as Managing Directors/Directors would not be liable to service tax.

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.

GST on director

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

  • If any Sales incentive/commission is offered to MD/WTD and it is offered as part of his employment contract, then in our view, it will take colors of salary only and it will be out of the purview of GST.
  • Trump rule for determination could be: When payment is made in terms of the employee-employer relationship, it will be covered under 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.
  • Other services from Director but not in Individual capacity (Like Renting of the property to the Company ) – When services are not provided by the director in his individual capacity, then it might not get considered under Reverse Charge Mechanism . Since RCM is applicable when services are provided by the director. However, it is advisable that each taxpayer should take an opinion on it after

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.


About the author

He has authored book on GST, titled as “Handbook on GST For Beginners”. Also he has authored Two E Book on - GST E Way Bill and GST Amendment Act. He has conducted seminars on GST, Indirect Tax & Foreign Trade Policy at – FIEO, ICAI, MSME, CII, MCCIA, WMTPA, Institute of Cost Accountant of India, Various association, colleges and Institutions etc He has conducted 250+ seminars on IDT across India, for Professional, Students, Officers, Practitioners etc He is instrumental in obtaining Circular from Department. Also, he is Recognized Faculty for GST by ICAI. He is member of IDT Study group Pune of ICAI. He is member of “Taxation Committee”, of MCCIA. He is Chairman of ‘CGST – L & R – Committee’ of WMTPA He is regularly writing the articles which are published in various leading Taxation Magazine and online portal.

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  1. Very in insightful article “GST on Director Remuneration: Analysis of Issue and How to Handle It”
    Have a related query

    If the I have a newly registered private company with expected annual turnover of less than 20 Lakh with no actual payments made to directors (except salary to MD) or any lawyer fee. Will it still need to register under GST or not? Will the GST registration still applicable because the reverse charge is applicable (though no actual payment attracting RC)

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