16-May-2020 An Update: Applicability of GST on Remuneration paid to Directors by Company
goods-and-service-tax rcm reverse-charge-mechanism gst-on-directors-remuneration gstThe Authority for Advance Ruling is established under GST Law to provide clarity on certain issues having more than one view and to remove ambiguity and draw conclusion on certain issues to some extent.
The Authority for Advance Ruling is established under GST Law to provide clarity on certain issues having more than one view and to remove ambiguity and draw conclusion on certain issues to some extent. The recent judgement of Authority for Advance ruling, Karnataka under GST law in the case of “Anil Kumar Agarwal” has drawn again attention to the topic of Applicability of GST on Remuneration paid to directors by a company and the view of this ruling is contradicting with the Ruling in case of M/s Clay Craft India Private Limited 2020 (4) TMI 228- Authority for Advance Ruling, Rajasthan dated 20 February 2020 and Alcon Consulting Engineers (India) Private Limited 2019 (10) TMI 793- Authority for Advance Ruling, Karnataka dated 25 September 2019.
1.We had updated you all regarding the outcome of Authority for Advance Ruling of Rajasthan in case of M/s Clay Craft India Pvt Ltd in our earlier blog on Applicability of GST on Remuneration paid to Directors by the company. In that blog, we had discussed about the said Rulings and our view with regards to that Rulings. Giving the gist of that blog which shall be useful to correlate or differentiate with the outcome of Karnataka AAR in case of “Anil Kumar Agarwal”.
Gist of Earlier Blog on
The Ruling of Rajasthan Authority in case of M/s Clay Craft India Pvt Ltd provides that the consideration paid to Directors by the Company will attract the GST. In the said ruling, the Authority of Advance Ruling has not considered the various documents & proof submitted by applicant to establish Employer-Employee relationship like Form-16 issued by company, IT Return (reporting income from Salary) of the director. Further the Authority had also has not referred to multiple legislation like Income Tax Act, Provident Fund, Companies Act, etc. The Authority of Advance Ruling merely held that director is not an employee and therefore, the benefit under Schedule III is not available ignoring the above facts.
It appears that the Authority of Advance has simply gone by the plain reading of notification issued in this regard without considering the other factors like Company Law, Income Tax Law, PF law etc.
However, we have formed our view in that blog stating that GST under Reverse Charge Mechanism shall not be applicable on Remuneration paid to Executive Director where there is contract of employment between the company and the director. Further TDS is deducted by the company under section 192 and director has declared remuneration as “Income from Salary” in his/her income tax return and Form 16 is issued by the company to the directors.
However, GST under RCM shall be applicable in case of sitting fees, commission and other services not covered under the employment contract with the directors. The said earlier blog can be accessed through below link:
Applicability of GST on Remuneration paid to Directors by Company:
2.The above topic is still the matter of the debate and has lots of ambiguity especially after the outcome of another ruling in this regard and both rulings are contradicting to each other.
In this blog, we shall discuss about the recent Authority for Advance Ruling of Karnataka in the case of Anil Kumar Agarwal dated 4th May 2020. In the said AAR, Authority has taken the same view which we had already discussed and formed. However, Both the Rulings have different view and are contradictory.
3.The fact of the case of this Ruling are: The applicant is an unregistered person and is in receipt of various type of income/revenue. One of the income/revenue is in the nature of “Receiving Salary as a Director from the Private Limited Company. The applicant has sought advance ruling in respect of the following questions.
Out of the given sources of Income/ Revenue which all Revenue income shall be considered for Aggregate Turnover for Registration under GST?
4.In the above Ruling, it was held by Authority of Advance ruling, Karnataka that remuneration received by the applicant as Executive Director is not includable in the aggregate turnover, as it is the value of service supplied by the applicant being an employee. Further if the applicant receives the remuneration as a Non-Executive Director, such remuneration is liable for tax under reverse charge mechanism under section 9(3) of the CGST Act 2017, in the hands of the company, under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017.
In the above ruling, Hon’ble Authority for Advance ruling has referred to various documents like agreement between the company and the applicant, copy of appointment letter, details of ESI, PF deduction to determine whether the applicant is Executive Director or Non-Executive Director.
5.The relevant extract of ruling is reproduced herein:
Salary received as Director from a Private Limited Company:-
The applicant is in receipt of certain amount termed as salary as Director of a private limited company. Two possibilities may arise with regard to the instant issue of amount received by the applicant. The first possibility that the applicant is the employee of the said company (Executive Director), in which case the services of the applicant as an employee to the employer are neither treated as supply of goods nor as supply of services, in terms of Schedule III of CGST Act 2017
The second possibility that the applicant is the nominated director (Non-Executive Director) of the company and provides the services to the said company. In this case the remuneration paid by the company is exigible to GST in the hands of the company under reverse charge mechanism under section 9(3) of the CGST Act 2017, in the hands of the company, under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017
In the instant case the applicant has not furnished any documentary evidence such as copy of agreement between the applicant and the said private company, copy of appointment order, details of ESI, PF deductions etc., so as to decide whether the applicant is in receipt of salary as an employee or as an independent director. Thus, in the absence of any documentary evidence, it is not possible to decide whether the amount received by the applicant is towards his services as an Executive Director or a Non-Executive Director.
In view of the above, the remuneration received by the applicant as Executive Director is not includable in the aggregate turnover, as it is the value of the services supplied by the applicant being an employee. Further if the applicant receives the remuneration as a Non-Executive Director, such remuneration is liable to tax under reverse charge mechanism under section 9(3) of the CGST Act 2017, in the hands of the company, under entry no 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017
. Thus, the value of the said services of the applicant being a Non-Executive Director are includable in the aggregate turnover, as it is the value of the taxable services supplied by the applicant, though the tax is discharged by the private limited company, under reverse charge mechanism.
6.In the earlier Ruling of M/s Clay Craft India Pvt Ltd, Hon’ble Authority for Advance Ruling has ignored the above points. Whereas we have considered the same and have formed our view after considering above facts which is similar to this recent AAR of “Anil Kumar Agarwal”.
APMH Speaks:
GST
under Reverse Charge Mechanism shall not be applicable on Remuneration paid to
Executive Director where there is contract of employment between the company
and directors. Further TDS is deducted by the company under section 192 and the
director declares remuneration as “income from salary” in his/her income tax
return and Form 16 is issued by the company to the directors.
However, GST under RCM shall be applicable in
case of sitting fees, commission and other services not under the employment
contract paid to the directors (Non -Executive Directors / Independent
Directors). It should be noted that if commission paid to director is under
employment agreement, and if it is included
in computing Salary for the purpose of TDS u/s 192 of the Income Tax
Act, then such commission paid to director should not be considered as supply
under GST and hence should not be liable to tax under Reverse Charge mechanism.
Same has been clarified by department in the
following circular issued by CBEC.
The Department has come up with clarification in
respect of levy of GST on Director’s remuneration-Reg. in Circular No.
140/10/2020 dated 10th June, 2020 which Provides that:-
Part of Directors’ Remuneration which is declared
as ‘Salaries’ on the books of company and subjected to TDS under Section 192 of
the IT Act, are not taxable being consideration for services by employee to the
employer in the course of or in relation to his employment in the terms of
Schedule III of the CGST Act, 2017.
And the part of Director’s Remuneration which is
declared separately other than ‘salaries’ in the Company’s accounts and subject
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. Further, in terms of notification No. 13/2017 –
Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e.
the Company, is liable to discharge the applicable GST on it on reverse charge
basis.
Please click on below link for ready reference of
circular:
The issuance of this circular has put to rest the
controversies created due to different views given by the Authorities for
Advance Rulings in different states. The view given by APMH has sustained
during this controversial period and confirmed by this circular. 5
Please feel free to write to us on neha@apmh.in / info@apmh.on for any further queries on the above blog.