IndiaGST - Director Remuneration

CBIC has issued Circular No 140/10/2020-GST, dated 10 June 2020 (‘Circular’), clarifying the position with respect to leviability of GST under reverse charge mechanism on the remuneration (or consideration or by whatever name called) payable to a director of a company.

The said topic has been the subject matter of dispute between the taxpayer and department. While Serial No 6 of Notification no 13/2017-CGST (Rate) dated 28 June 2017 states that remuneration payable to a director is liable to GST under reverse charge mechanism, Entry no. 1 of Schedule III to the CGST Act, 2017 provides that services rendered by an employee to the employer in the course of employment is outside the purview of GST. The moot question in determining the leviability of GST on the Director’s remuneration is to decide whether or not a ‘Director’ is an employee of the company.

Several advance rulings have been pronounced in the recent past providing divergent views with respect to the same. While the Rajasthan Authority for Advance Ruling in the case of M/s Clay Craft India Private Limited had ruled that amount payable to directors as remuneration is subject to GST under reverse charge mechanism, the Karnataka Authority for Advance Ruling (in case of Mr Anil Kumar Agarwal) provided that executive directors of the Company are employees of the company and hence, remuneration paid to executive directors are not subject to GST under reverse charge.

The instant circular attempts to clarify the position which is summarised as follows:

Levy of GST on remuneration paid by companies to the independent directors or those directors who are not the employee of the said company –

1.    Reference has been drawn to the definitions of Whole-time director and independent director under the Companies Act, 2013 and following conclusions have been made:

·      The definition of whole-time director as per Section 2(94) of the Companies Act is inclusive in nature and may include a person who is not an employee

·      An independent director is a person who should not have been an employee or a partner or a proprietor in the said Company

2.    Accordingly, it has been clarified that remuneration paid to all such independent directors or other directors, who are not employees of the company, is taxable in the hands of the recipient company under reverse charge mechanism. It is to be noted that all the whole-time directors have not been treated equally. Only the directors who are not employees of the Company have been brought under the GST net (under the reverse charge mechanism).

Leviability of GST on remuneration paid by companies to the directors, who are also an employee of the said company –

1.   The Circular states that once it is determined whether the director is an employee, it is relevant to determine if the activities performed are in the course of employer-employee relationship or not (referring to the terms ‘contract of service’ and ‘contract for service’).

2.   While it has not been specifically clarified who is an employee, Para 5.1 of the Circular indicates that existence of master-servant relationship is an essential characteristic of employment (‘contract of service’).

3.   Further, referring to the treatment of director remuneration under Income Tax Act, 1961, the Circular clarifies that the part of Director’s remuneration which are declared as ‘Salaries’ in the books of the company and subjected to TDS under Section 192 of the Income Tax Act, are not taxable under GST being consideration for services by an employee to the employer in the course or in relation to the employment under Schedule III of the CGST Act, 2017. Any other amount which is subjected to TDS under Section 194J is liable to GST being outside the scope of Schedule III of the CGST Act.

The gist of the Circular has been captured in a table below: