13-Apr-2020 Applicability of GST on Remuneration paid to Directors

• Introduction

The recent judgement of Authority for Advance Ruling, Rajasthan under GST Law has been the point of discussion / debate since it’s outcome. The ruling of M/s Clay Craft India Pvt Ltd. has drawn attention in relation to the ‘Applicability of GST on Remuneration paid to Directors by Company under Reverse Charge Mechanism’.

While the ruling provides that the consideration paid to Directors by the company will attract GST, it is important to analyse the same and check whether the view taken by the Authority is correct or whether it is subject to a different interpretation. In this blog, we shall be analysing the applicability of GST on the services provided by directors to the company and form our view. 

1.    Background

GST under reverse charge mechanism shall be applicable on the “service supplied by a director of a company or body corporate to the said company or the body corporate by company or a body corporate located in taxable territory.” This same is notified under Notification No. 13/2017 – Central Tax (Rate) dated 28th June 2017 as amended from time to time.

Under erstwhile Service Tax Law, Service Tax was applicable under reverse charge mechanism on “the services provided or agreed to be provided by a director of a company to the said company.” But since its introduction it has been subject of debate with regards to applicability of tax on consideration received by the directors. 

2.    Mechanism for Introduction of Tax

Entry no. 6 of Notification No. 13/2017- Central Tax dated 28th June, 2017 prescribes the levy of tax on services supplied by a director of a company or body corporate to the said company or the body corporate by company or a body corporate located in taxable territory. 

3.    Rulings of AAR under Debate: 

·         In case of M/s Clay Craft India Pvt. Ltd, it was held by the Hon’ble Authority of Advance Ruling of Rajasthan that Directors are not employee of the company, thus levy of GST is valid, and RCM will be applicable. 

The fact of the case of the above-mentioned ruling as explained by the applicant company are as under : - “Directors are performing all the duties and responsibilities as required under laws. However, along with that, these all directors are also engaged in day to day working in the company at different level of management. In other words, they are also working as employee of the company for which they are being compensated by the company by way of regular salary and other allowance and company is also deducting TDS on their salary. PF laws are also applicable to their service Therefore, in all practical purposes these directors are employee of the company and are working as such besides being Director of the Company.” 

In this ruling, the Hon’ble Authority of Advance Ruling Rajasthan said that Director is supplier of Service and the applicant (i.e. company) is the recipient of the service. It said that the Notification No. 13/2017-Central Tax (Rate) dates 28th June 2017 as amended from time to time clearly states that services supplied by a director of a company will be considered as supply under GST Law and hence the directors cannot be called an employee. 

·         In another similar issue, in case of  by M/s Alcon Consulting Engineers (India) Pvt. Ltd., it was held by Hon’ble Authority of Advance ruling Karnataka that remuneration paid to the directors of the applicant company is liable to tax under reverse charge mechanism under section 9(3) in the hands of the applicant company as it is covered under entry no. 6 of Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017. 

·         However, in our view just because notification states that services supplied by director of company will be considered as supply it can’t be said that director is not employee. The relationship/contract between company and the directors are required to be checked with various laws like Company Law, Income Tax Law, PF Law, etc. The same has been discussed in this blog to arrive at our view. 

4.    Whether Supply of Services by director to company constitute a Supply under the GST law?

“As per section 7(1) of the, Central Goods and Services Tax Act, 2017 the expression “supply” includes-

(a)  All forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or dispose made or agreed to be made for a consideration by a person in the course or furtherance of business;

(b)  Import of services for a consideration whether or not in the course or furtherance of business;

(c)  The activities specified in schedule I, made or agreed to be made without a consideration

(d)  ----Omitted----- 

(1A) Where certain activities or transaction constitute a supply in accordance with the provisions of sub section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.

 

2) 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.” 

Further Schedule III of CGST Act 2017 is related to “activities or transactions which shall be treated neither as a supply of goods nor a supply of services.”

Below is the relevant entry of above-mentioned Schedule III:

 “Services by an employee to the employer in the course of or in relation to his employment.”

From the above provision, it is clear that employee who is rendering service under employment to his employer would not constitute service or Supply.

 

5.    Let us understand the meaning of Employee and director 

·         As per Cambridge Dictionary, “Employee means someone who is paid for someone else.” 

·         As per Clause 2(e) of Employee Provident Fund Scheme, 1952, “Employee” means a person appointed to or borne on the cadre of the staff of the corporation, other than persons on deputation; 

·         As per Companies Act 2013:

There are two types of Directors: Executive Director and Non-Executive Director.

o   As per Rule 2(1)(k) of the companies (Specification of definition details) Rules, 2014, “Executive director means a whole-time director as defined in clause (94) of section 2 of the Act.” 

o   As per Section 2(94) of Companies Act, 2013 “whole-time director” includes a director in the whole-time employment of the company.” 

Non-Executive means a person who is not falling in conditions of definition of Executive Director.

Executive Directors are engaged in day to day operation of the company. Whole time director and Managing Director are executive directors. They receive remuneration from the company.

Non-Executive director generally receive sitting fees/commission as professional fees for rendering service for the company. 

·          The General Circular No. 24/2012 dated 9th August, 2012 issued by MCA provides that: -        

The Finance Act 2012 has introduced Service Tax which is applicable to anyone who provides a Service not covered under the negative/exempted list and if the value of annual revenue is more than Rs. 10 lakh. The Non-Whole Time Directors of the Company are presently not covered under the exempted list and as such, the sitting fee/ commission payable to them by the company is liable to Service Tax. 

·         Provision under Income Tax Act, 1961 

o   TDS is deducted under section 192 (Payment of Salary to employee) on the payment made to remuneration to director. Form 16 is also issued by the company. 

o   TDS is deducted under section 194J (Fees for Professional Services) on the sitting fees/commission paid to the director. 

o   Remuneration received by Director from the company is taxable under the head “Income from Salary”. 

o   Director sitting fees and commission received is taxable under the head “Income from other sources” 

Thus, Remuneration paid to the director is in the nature of the employment if there is agreement for contract of employment between company and director and fulfilling the above-mentioned conditions. 

6.   There is a favourable judgement under erstwhile Service Tax Law. In case of Allied Blenders And Distillers (P.) Ltd., CESTAT Mumbai Bench has held that directors who are concerned with management of the company, were declared to all the statutory authorities as employee of the company and complied with the provisions of the respective Acts, Rules and Regulations indicating the director as an employee of the company. 

Assesse-company paid remuneration to its four whole time directors for managing day-to-day affairs of company and made necessary deductions on account of Provident Fund, Profession Tax and TDS as applicable and declared these Directors to all statutory authorities as employees of company, remuneration paid to Directors was nothing but salary and assessee was not required to discharge service tax on remuneration paid to Directors. Thus, levy is not valid. 

APMH Speaks:

* In case of  AAR of M/s Clay Craft India Pvt. Ltd, the applicant had submitted all the required documents and it had referred to multiple legislation like income tax, provident fund, companies Act, submitted Form-16, IT return (reporting income as salary), etc. to demonstrate that the director is an employee for all other legal purposes. 

Similar ruling was also pronounced by The Authority for Advance Ruling of Karnataka in case of M/s Alcon Consulting Engineers (India) Pvt. Ltd. In this case also, the Authority stated that director is not an employee and hence, RCM provisions are applicable. 

The Authority for Advance Ruling did not negate any of the contentions given by the applicant. It merely stated that the director is not an employee and therefore, the benefit mentioned under Schedule III is not available. 

* However, under erstwhile Service Tax Law, there is a positive ruling of CESTAT Mumbai Bench in the case of Allied Blenders and Distillers (P.) Ltd. wherein, the benefit of employment was given &  the RCM service tax demand raised by the department on Director’s Services was quashed. 

The CESTAT Authority had relied upon other legislations with regards to meaning of the term ‘Director” and income tax returns to affirm that director was indeed an employee of the company. 

* It appears that the Authority for Advance Ruling in Rajasthan  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. 

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 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 under the employment contract paid to the directors. 

The correct interpretation of law should  be clarified by the GST Council / Government in order to avoid litigation in future.

Please feel free to write to us on info@apmh.in / neha@apmh.in for any further queries on the above blog.