CBIC Clarifies Applicability Of GST On Directors' Remuneration

After much confusion and debate surrounding the applicability of the Goods and Services Tax on the remuneration paid to the director at an organisation, the Central Board for Indirect Taxes and Customs (CBIC) has issued a clarification on the applicability of the indirect tax on remuneration paid to whole-time and independent directors. 

This clarification was issued after conflicting advance rulings were announced by two different benches of the Appellate Authority of Advance Ruling. The new circular by the CBIC distinguishes between directors who are also employees of the company or whole-time directors and others who serve as directors and are not employees of the company or independent directors. 

The circular issued by the CBIC read as follows:

If a director is not engaged as an employee of the company, services provided by such director are liable to GST. The company (as a recipient of such services) is required to discharge GST on a reverse charge basis in such cases as per Notification No. 13/2017- Central Tax (Rate) dated June 28 2017.

In case a director is a 'whole-time director' and is also engaged in the capacity of an employee, then such person may be entitled to remuneration in a dual capacity, that is, salary for services provided as an employee, and sitting fees for the services rendered as a director. In such cases:

- Any sum paid as salary on which Tax is Deducted at Source ('TDS') under Section 192 of the Income Tax Act 1961, would not be subjected to GST as that is a consideration received for service rendered by an employee to an employer in the course of employment, which falls within Schedule III of the CGST Act;

- Any sum paid as sitting fees which is subjected to TDS under Section 194J of the Income Tax Act 1961, will also be subjected to GST, as it is a consideration received for services provided by a director to the company. The company is required to discharge GST on a reverse charge basis in such cases as per Notification No. 13/2017- Central Tax (Rate) dated June 28 2017.

As per this circular, it has finally been clarified that the services of an independent director and its subsequent remuneration are subject to GST by reverse charge mechanism. Concerning whole-time directors who also serve as employees and are receiving remuneration in a dual capacity, the sum paid as a monthly salary is liable to a TDS or tax deducted at source deduction, while the remuneration paid for sitting fees in the capacity of a director will be subject to GST as it falls under the category of consideration services.

In Summary

The Central Board of Indirect Taxes and Customs (CBIC) in its notification dated June 10, 2020, had released a clarification on the ongoing confusion about the applicability of GST on the remuneration of directors under Schedule III of the Central Goods and Services Tax Act (CGST Act), 2017, the scope of entry under the heading of "services by an employee to the employer in the course of or in relation to his employment".

With this respect, the CBIC has broken down the issue into two categories:

• Independent directors – applicability of GST on salary paid by companies to independent directors as under section 149(6) of the Companies Act, 2013 or directors who are not employees of the said company; and

• Whole-time directors – applicability of GST on salary paid by companies to whole-time directors including managing directors who are employees of the said company.

Applicability of GST on the remuneration of Independent Directors

For examination of the definition of independent directors, the CBIC referred to Section 149(6) of the Companies Act, 2013, with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 and identified that independent directors are not employee or proprietor or partner of the said company. Hence, the services provided by the independent directors to the said company do not fall under the scope of Schedule III of the CGST Act and are therefore taxable. This means the salary paid to the independent directors by the said company will attract GST under reverse charge mechanism.

Applicability of GST on the remuneration of Whole-time Directors

In the case of whole-time directors, the activities were examined based on "contract for service". CBIC had pointed out that in case of a director employed by the company in a dual capacity, i.e. of a director as well as an employee, the employee function may be related as under a contract of service (employment) entered into with the company. Section 192 of the Income Tax Act, 1961 (IT Act) states that remuneration paid to directors are subject to a Tax Deduction at Source (TDS). However, there can also be some directors whose remuneration is paid as professional fees and not as salary, and the TDS for such directors is deductible under Section 194J of the IT Act. Therefore, the CBIC clarified that the remuneration for the directors paid in the form of salaries and whose TDS is collected under Section 192 of the IT Act is not taxable. Even so, the directors for whose remuneration is paid other than the salaries and whose TDS is collected under Section 194J of the IT Act as taxable under the reverse charge mechanism.