Taxability of director's remuneration
A lot of discussions are going on concerning the taxability of director's remuneration under GST subsequent to a ruling pronounced by Rajasthan AAR in the matter of M/s Clay Craft India Pvt. Ltd. vide Order no. RAJ/AAR/2019-20/33 dated 20 February 2020.
In this matter, question that came up before the Rajasthan AAR is whether the salary paid to whole time director(s) is covered under Notification No. 13/2017 - Central Tax (Rate) dated 28 June 2017 to attract GST under Reverse Charge or covered under Entry no. 1 of Schedule - III of CGST Act, 2017 read with Section 7 of CGST Act, 2017 to fall outside the ambit of taxable supply?
The Applicant had on its board 6 directors who were drawing salary and working qua full-time employees being treated at par with other employees of the Applicant. The Applicant was deducting TDS on their salary and PF laws were also applicable; apart from which all other policies and benefits applicable to other employees as per the policy were also being given to the Directors.
The Authority for Advance Ruling, in this matter, while holding that salary so paid to Directors is taxable under reverse charge observed that the consideration paid to directors is against the supply of services provided by them to the Applicant as directors are not the employee of the Company. It was further observed that Notification No. 13/2017 has given distinct identity to the services provided by the Director and specifically included in the category of service on which GST will be payable under RCM.
Earlier, Karnataka AAR in the matter of Alcon Consulting Engineers (India) P. Ltd. vide Order No. KAR ADRG 83/2019 dated 25 September 2019, also pronounced a similar ruling.
It is important to note that both the rulings are pronounced sans considering the concept of different types of director, as provided in Company Law, like Independent Director, Whole -Time Director, Managing Director, Executive Director, etc. and the capacity in which the services is being rendered by these directors to the Company.Analysis
Entry no. 1 of Schedule - III of CGST Act, 2017 read with Section 7 of CGST Act, 2017 provides that 'Services by an employee to the employer in the course of or in relation to his employment' will not be treated as either supply of goods or services and thus, no GST implication arises thereupon. However, the above two rulings have clearly ruled out the possibility that director can be an employee of the Company, contrary to what the position under Service tax regime was.
Service tax law vide Section 65(44) of Finance Act, 1994 and Clause (ivb) of Notification No. 30/2012 - S.T. dated 20 June 2012, as amended, also contained exactly similar provisions regarding to Director's remuneration where 'provision of service by an employee to the employer in the course of or in relation to his employment' was kept outside the definition of Service itself and 'Service provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate' was taxable under Reverse Charge in the hands of said body corporate.
CBIC (then CBEC), had issued some circulars under Service tax regime which clearly provides that the legislative intent has always been to differentiate between the services provided by directors in individual capacity (taxable under RCM) from that provided in the capacity of employee (non-taxable).
- Circular No. 115/09/2209 -S.T. dated 31 July 2009 observed that Manging Director (Whole -time or Independent) perform management functions and generally do not provide any consultancy or advisory to company. However, whether any separate service of consultancy or advisory is being provided depends on case to case.
- General Circular No. 24/2012 bearing F. No. 14/33/2012-CL. VII dated 09 August 2012 clarified that sitting fee/commission payable to Non-Whole Time Director(s) of the company are taxable under Service tax.In addition to this, there are many judicial pronouncements under Service tax-
- Hon'ble Mumbai CESTAT in the matter of Rent Works India Pvt. Ltd. v. Commissioner of C. Ex., Mumbai - V, reported in 2016 (43) S.T.R. 634 (Tri. -Mumbai) held that there is a difference between salary and consultancy fee inasmuch as when the Income Tax Department considers payment in the nomenclature 'consultancy fee' as salaries, on which TDS is also made, the said payments cannot be said towards rendition of taxable service for levy of service tax
- Hon'ble Mumbai CESTAT in the matter of Allied Blenders and Distillers Pvt. Ltd. v. C.C.E. & S.T., Aurangabad, reported in MANU/CM/0499/2018, after going through the Articles of Association, resolution passed by BOD for appointment of such directors, Form - 16 issued by the Company, Form - 32 filed by the Company with ROC, etc. held that the whole time directors were working in the capacity of employee and thus, salary paid to them is not taxable.
- Hon'ble Kolkata CESTAT in the matter of Brahm Alloy Limited v. Commissioner of CGST & C. Ex., Durgapur, reported in 2019 (24) G.S.T.L. 616 (Tri. - Kolkata) has also held that whether the services provided by the director is in employer-employee capacity or as an independent service provider, depends on various facts, like, terms of appointment of such director, how the payment of remuneration is made to director, treatment of remuneration under Income Tax Act, etc.
- Hon'ble Kolkata CESTAT in other matters of Concrete Pvt. Ltd. v. CCE, Siliguri, cited in 2018 (9) GSTL 391 (Tri. - Kolkata) and Maithan Alloys Ltd. v. CCE & ST, Bolpur, cited in MANU/CK/0094/2018 has also observed that consideration paid to whole time directors would be treated as payment of salaries inasmuch as there would be employer - employee relationship and in such cases, there cannot be any levy of Service tax.
Summing up, as can be inferred from above judicial pronouncements, it can be concluded that based upon various factors (terms of engagement of director, treatment under Income Tax Act, etc.) and taking reference from provisions contained in Companies Act, 2013, it must be ascertained that whether the director to whom remuneration is being paid is providing the services in the capacity of employee or in independent capacity as a consultant.
Where services are provided qua an employee to the Company, salary so paid to director either in the form of commission or percentage or in any other form, shall fall outside the ambit of GST but where independent services are being provided by Director for which consideration is received in the form of commission, consultancy fee, sitting fee, or by any other name, it shall be taxable under Reverse Charge in hands of the Company.