GST on Director’s Remuneration – A Critical Analysis

Under GST laws, some of the common functions carried out at an organization’s head office like human resource, IT functions, audit and legal operations incur cost as they are identified as a service. Recently, the Government has started questioning top companies and banks on their practice of passing on some of the common costs like salaries of chief executives to their branch offices. This means that if companies were to treat services as supply, then the people, like Directors or CXOs, providing the service will pay GST. Let’s have a look at the critical analysis of the situation.

Section 9(3) and Section 9(4) of the CGST Act, 2017 contains the provisions with respect to Reverse Charge Mechanism in respect of certain services which are notified from time to time. Notification 13/2017 – CT (R) dated 28-06-2017 vide entry No. 6 provides for levy of RCM on services provided by a director of the company or a body corporate to the said company or body corporate. Further, Schedule III of CGST Act, 2017 provides for certain transactions which are neither considered as supply of goods or supply of service. Reading both these provisions together raises the below questions:

•  Whether Salary or Remuneration paid to Directors is liable for payment of GST under Reverse Charge Mechanism?
  
•  In case the same is excluded under Schedule III, what is the relevance of Entry 6 in Notification No 13/2017 – CT

This question is more relevant considering the decision of the Authority of Advance Ruling in Karnataka where in the case of M/s Alcon Consulting Engineers (India) Pvt Ltd, it held that the remuneration paid to the directors is subject to GST under reverse charge and is covered under entry 6 of the notification 13/2017-Central Tax dated 28-06-2017.

Though the ruling does not provide for a detailed reasoning for the applicability of GST on the same, one may need to consider various scenarios/laws/acts in order to apply such a proposition for taxability under Reverse Charge Mechanism.

Roles and Responsibilities of different types of Directors

There are different kinds of directors that a company can appoint. Broadly they can be divided into two categories – executive directors and non- executive directors. Executive directors are the ones who basically are involved in the day to day execution of the affairs of the Company and include whole time directors, managing directors, etc. whereas non-executive directors include independent director, nominee director etc. The executive directors of a company receive remuneration and are in full time employment of the company.

The non-executive directors are generally the ones who are professionally involved merely in broad business of the Company and do not involve into the day to day activities. These non-executive directors attend the board meetings and receive sitting fees or commission for providing services to the company or body corporate. Companies Act, 2013 The Companies Act, 2013 has defined the term “whole time director” under section 2(94) of the Companies Act, 2013 as follows:

(94) “whole-time director” includes a director in the whole-time employment of the company’

The above definition and explanation contained in Section 269 of Companies Act, 1956 are similar. It is evident from the explanation and the definition that the words used are “whole-time employment of the company” and the said words used clarifies the intention of law that the whole-time director are the persons who devotes their whole time in management of the company.

Treatment under Income Tax Act, 1961

Under the Income Tax Act, 1961 the remuneration paid to directors is subjected to TDS u/s 192 of the Income Tax Act, 1961. Section 192 provides for deduction of TDS in case of payments which are Salary.

The said remuneration received is in lieu of managing the affairs of the company in the capacity of employee and taxed as salary in hands of directors.

Also, the remuneration paid to the directors is assessed under the head “Income from Salary” by Department of Income Tax.

Non-Executive Directors are not entitled to remuneration but are subject to payment of Sitting Fees. As far as Director Sitting Fees paid is concerned, the same is liable for deduction under section 194J and considered as professional fees and not Salary.

Treatment under Companies Act, 2013

Under the Companies Act, a General Circular No. 24/2012 dated 09.08.2012 issued by Ministry of Corporate Affairs (MCA) clarifies that 

“The Non-Whole Time Directors of the company are presently not covered under the exempted list and as such, the sitting fees/commission payable to them is liable to Service Tax. Service tax is payable on the commission/sitting fees payable to Non-Whole Time Directors of the company.”

It is evident from the above circular issued by MCA that even under the service tax regime, service tax was payable only on any commission or sitting fees paid to Non-Whole Time Directors. The exclusion of Whole-time Directors and Managing Directors in the above circular clarifies the intention of legislature that the said directors are employees of the company and activities carried out by them cannot be termed as service and made liable to service tax. Extending such arguments to the provisions of GST law, similarly the same should not be made liable for payment of GST.

Conclusion

Ongoing through the discussion and findings of the ruling pronounced by the Hon’ble Authority of Advance Ruling of Karnataka, point 5 of the ruling states that directors are not employees of the company and the remuneration paid to them by company is for the services provided by the directors to the company. Thus, the same is covered under entry 6 of the Notification 13/2017 – CT dated 28-06-2017 and liable to GST under reverse charge mechanism.

However, one needs to carefully consider the facts of each case to determine whether the amount paid to a director is with respect to his employment with the company or with respect to an independent professional. Therefore, a conjoint reading of Notification No 13/2017 – CT and Schedule III, one may be able to conclude that any amount paid to Director which is in the nature of employment contract is not liable for payment of GST. Whereas any amount paid to Directors in the nature of professional relationship will be liable for Reverse Charge Mechanism.

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