GST on remuneration paid to Director - Circular
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.
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.
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 –
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
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 –
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’).
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’).
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:
Whole-time directors(‘WTD’) including managing director who are
employees of the said company.
Where such remuneration is declared Salaries in the books of
the company and subjected to TDS under Section 192 of the IT Act.
Falls under the category of ‘services by an employee to the employer
in the course of or in relation to his employment’ under Schedule III. NOT
liable to GST.
Where such remuneration declared separately other than
salaries in the books of the company and subjected to TDS under
Section 194J of the IT Act
Remuneration paid for such services provided are outside the purview
of Schedule III & therefore taxable in hands of the company, on
reverse charge basis vide entry no 6 of notification No. 13/2017 – Central
Independent Directors defined in
terms of section 149(6) of the Companies Act, 2013 or those directors who
are not the employees of the said company