In a recent ruling, the Authority of Advance Ruling, Rajasthan (‘AAR’) in case of Clay Craft India Pvt. Ltd. held that the GST shall be chargeable on the remuneration paid or payable to the directors on Reverse Charge Mechanism. The Authority merely treated directors as service providers providing service to the company and not as employees of the company. This ruling, thus, arises a moot question – Whether GST is chargeable on the consideration paid or payable for the services rendered by every director?
The AAR’s decision is solely based on S.L. No. 6 of Notification No. 13/2017- Central Tax (Rate) dated 28th June, 2017 which provides for levy of GST on Reverse Charge Mechanism on services supplied by a director of a company or a body corporate to the said company or the body corporate.
To start with the discussion, let’s throw some light on the taxable event under GST i.e. “supply” in regard to the topic as per the relevant provisions of the Central Goods & Services Act, 2017.
As per Section 7 (1) of the CGST Act 2017, “supply” includes–
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by apersonin the course or furtherance of business but does not include activities or transactions specified in Schedule III.
SCHEDULE III: Activities or Transactions Which Shall Be Treated neither As a Supply of Goods Nor A Supply of Services
1. Services by an employee to the employer in the course of or in relation to his employment.
It now comes to the understanding that whether the remuneration paid or payable to the directors by the company will be chargeable to GST or not will be decided on the fact that whether the director is an employee to the company or not.
The term “employee” is not defined in the Central Goods & Services Act, 2017. Hence the same should be understood in common parlance with the aid of other laws. Since the issue in question involves supply of services of director to a company or a body corporate, reference may be drawn from the Companies Act, 2013 where “Executive Director” and “Whole-time Director” are defined as follows:
As per Rule 2(1)(k) of the Companies (Specification of definitions details) Rules, 2014 “Executive Director” means a Whole Time Director as defined in clause (94) of section 2 of the Act”; and
As per Clause (94) of section 2, “whole-time director” includes a director in the whole-time employment of the company.
Hence, the Companies Act, 2013 regards these directors to be in employment with the Company and hence we may say that the “Employer- Employee” relationship persists between such class of directors and the company.
Also as per Explanation to Section 62(1)(b) of the Companies Act, 2013 ‘‘Employee’’ means-
(a) a permanent employee of the company who has been working in India or outside India; or
(b) a director of the company, whether a whole time director or not but excluding an independent director; or
(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company
but does not include-
(i) an employee who is a promoter or a person belonging to the promoter group; or
(ii) a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.
Although the Explanation is in relation to “Issue of Employee Stock Options”, we can get a fair idea about the concept of “employee” in the Companies Act, 2013.
Further, it is pertinent to note that the director may provide to the company an array of services for which the company makes payment to the director such as:
- Services as Director which is in the nature of employment for which Director’s Remuneration is paid as consideration
- Sitting Fees
- Professional Fees on Individual Capacity etc.
In my view, out of the above, the remuneration received in terms of employment shall not be subject to GST as per Clause 1 of Schedule III of the CGST Act. The rest of the considerations paid to the director apart from the one which is paid in relation to employment, shall be liable to be taxed on Reverse Charge Mechanism under GST as per Notification No. 13/2017- Central Tax (Rate) dated 28th June, 2017.
In this regard, references may be drawn from the other legislations.
Treatment under Income Tax Act, 1961
The fact that TDS is deducted under section 192 of Income Tax Act, 1961 on the salary/remuneration paid to the whole time directors /executive directors is a conclusive evidence that the amount paid as remuneration is nothing but consideration paid for services rendered by such directors in the capacity of employee of the company. Furthermore, the fact that remuneration received by the whole time directors, executive directors etc. is shown in their Income Tax Returns under the head ‘Income from Salary’ also fortifies the fact that the amount received is in lieu of their employment with the company. As such, when CBDT, being one of the wings of the Government is accepting the amount paid to these directors as salary in lieu of employment, it will be unjustified on the part of the other wing of the Government to take a contrary stand by levying GST on the same considering the remuneration as merely a service and not as salary in lieu of their capacity as employee of the company.
Treatment under Companies Act, 2013
As discussed above, the executive and whole time directors are regarded to be employees of the Company as per the Companies Act, 2013. Further MCA has issued General Circular No. 24/2012 on 9th August, 2012 during the erstwhile Service Tax Regime, an excerpt of which reads as follows:
“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.” The Circular issued by MCA signifies the fact that Service Tax is payable on considerations like sitting fee or commission paid to Non Whole Time Directors i.e. the directors who are not in whole time employment of the Company and not on remuneration in the nature of salary. Thus it may be inferred that GST is not attracted on salary to directors in the similar essence of the Service Tax.
Treatment under Erstwhile Service Tax
The issue regarding leviability of service tax on remuneration paid to the directors was a matter of concern during the Service Tax regime as well since the time of introduction of Reverse Charge Mechanism in respect of services provided or agreed to be provided by a director of a company to the said company. Although it was held that service tax is not applicable to the remuneration paid to employee directors in some of the decisions by the Hon. CESTAT, the issue has fuelled litigations throughout these years due to lack of clarification from the CBEC.
Now even in the GST regime, the matter still remains to be a topic of debate and with the recent AAR ruling in case of Clay Craft India Pvt. Ltd., it has only triggered more confusion. A clarification regarding the taxability of services provided by directors to company or body corporate is much needed at this point to put an end to all the confusion.
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