Various indications have been received from trade and industry seeking clarification whether the GST is leviable on Director’s remuneration paid by companies to their directors.
Whether the remuneration paid by companies to their directors falls under the ambit of entry in Schedule III of the Central Goods and Services Tax Act, 2017 i.e. “services by an employee to the employer in the course of or in relation to his employment” or whether the same are liable to be taxed in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017 (entry no.6) i.e reverse charge basis(RCM).
The issue of remuneration to directors has been examined under the following two different categories:
(i) applicability 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
The primary issue to be decided is whether or not a “Director” is an employee of the company. In this regard, from the perusal of the relevant provisions of the Companies Act, 2013, it can be concluded that:
- the definition of a “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.
- the definition of “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 which he is proposed to be appointed in the said company.
Therefore, in respect of such directors who are not the employees of the said company, the services provided by them to the Company, in lieu of remuneration as the consideration for the said services, are clearly outside the scope of Schedule III of the CGST Act and are therefore taxable in the Hands of Company, on reverse charge basis(RCM).
Generally, under the GST Act, the liability to pay GST to the Government is on the supplier. However, in certain cases, the liability to pay GST to the government falls on the recipient. This is known as the reverse charge mechanism.
(ii) applicability of GST on remuneration paid by companies to the whole-time directors including managing director who are employees of the said company
Once, it has been ascertained whether a director, irrespective of name and designation, is an employee, it would be pertinent to examine whether all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service”) or is there any element of “contract for service”.
(1.) The issue has been deliberated by various courts and it has been held that a director who has also taken an employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other under a contract of service (employment) entered into with the company.
(2.) It is also relevant to note that 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. 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.
(3.) Accordingly, it is clarified that the part of Director’s remuneration which is declared as “Salaries” in the books of a company and subjected to TDS under Section 192 of the IT Act is not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.
(4.) It is further clarified that the part of 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 treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is, therefore, taxable the hand of Company, and is liable to discharge the applicable GST on it on reverse charge basis(RCM).