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The purpose to set up the concept of Advance Ruling Mechanism under GST was to provide clarity in terms of unanswered questions of the law and to remove the ambiguities which may later result in disputes between the Department and the registered persons.

However, in the decisions given by the Authority for Advance Rulings (AAR) in Karnataka (AAR No. KAR ADRG 83/2019 in M/s ALCON CONSULTING ENGINEERS INDIA PVT LTD.), and Rajasthan (AAR No. RAJ/AAR/2019-20/33 in M/s CLAY CRAFT INDIA PVT LTD.), it was ruled that the directors are not the employees of the company, hence the services provided by the Directors to the company are not covered under Clause (1) of the Schedule III to the CGST Act 2017, therefore making the said services taxable under Reverse Charge Mechanism (RCM) [as per Notification No. 13/2017 - CT (R) dt. 28th June 2017].

Such advance rulings have created more confusion in the industry as to whether directors are to be considered the employees of the company and which Director payments are subject to RCM under GST. Though the rulings do not provide for a detailed reasoning for the applicability of GST on the same, one may need to consider various scenarios/laws/acts in order to apply such a proposition for taxability under Reverse Charge Mechanism.

Applicability of GST on Directors  Remuneration

There are different kinds of directors that a company can appoint. Broadly these can be divided into 2 categories:

Executive Directors (Includes Whole Time Directors, Managing Directors) who are generally involved in the day to day affairs of the Company;

Non-Executive Directors (Includes Independent Director, Nominee Director) who do not involve in day to day activities of the company and receive sitting fees or commission for their services
Section 2(94) of the Companies Act 2013, defines 'Whole Time Director' as:

'whole-time director' includes a director in the whole-time employment of the company'

If we look at the GST perspective, Clause (1) of Schedule III (Services which shall neither be treated as supply of goods or services) to the CGST Act says:

 

'Services by an employee to the employer in the course of or in relation to his employment'

Further, Entry No. 6 of the Notification No. 13/2017 - CT (R) Dt. 28th June 2017 (which prescribes services on which GST shall be paid under RCM) says:

  • Service
  • Provider of Service
  • Recipient of Service
  • Percentage of Tax payable by service recipient
  • Services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate;
  • A director of a company or a body corporate
  • A company or a body corporate
  • 100%
 

Thus, as per the above provisions, it is clear that any service provided by the employee to the employer in the course of employment would fall outside the purview of GST. However, service provided by the director to his company would be liable to GST under RCM. Now question arises -

  • whether director would be considered as employee of the company
  • whether all the services rendered by the director would fall under the ambit of RCM.

The terms employee and employer are not defined under the GST Act. Hence, for better understanding, it is suitable to refer the Section 2(9) of the Employees' State Insurance Act 1948, which basically states that the definition of employee includes any person employed for wages in connection with the work of his company.

There have been many past rulings which can be referred in this regard:

Hon'ble Supreme Court in the case of ESI Corporation vs Venus Alloy Pvt. Ltd had held that if the Director of a Company receives remuneration for discharge of any duty, then the Director will come under the definition of "employee" u/s 2(9) of the ESI Act 1948.

Hon'ble CESTAT in case of Allied Blenders and Distillers Pvt. Ltd. had held that the Directors are portrayed to be the employee of the appellant, therefore Directors' Salaries are not chargeable to Service Tax.

Hon'ble CESTAT in case of M/s. Maithan Alloys Limited had held that whole time Directors are essentially employees of the company and whatever remuneration was being paid was governed by employer-employee relationship, thus levy of service tax could not be sustained.

Another factor which could aid in establishing the relationship between the Directors and the company is whether TDS u/s 192 of the Income Tax Act is being deducted considering payment as salary or considering the nature of payment as professional fees.

Conclusion

Therefore, post a conjoint reading of Notification No 13/2017 - CT, Schedule III and the above mentioned past judgements, it can be inferred that any amount paid to Directors which is in the nature of salary governed by employment contract should not be liable for payment of GST, whereas any amount paid to Directors who are not on the payroll of the company will be liable for GST under RCM.

Thus, it can be seen that the Karnataka as well as Rajasthan AAR have erred in making the correct interpretation of the law and only increased the ambiguities rather than reducing them, resulting in increased confusion in the industry on the subject matter. However, as per Section 103 of the CGST Act 2017, such ruling is only binding on the applicant who has sought it and is liable to appeals as well.

Generally, payments by way of Sitting Fees, Commission, etc. are taxable under RCM as such payments are made to those directors who are not under the employment of the company, whereas Salary is paid to those directors who are bound by the employment contract.

Summing up, one needs to carefully consider the facts of each case to determine whether the amount paid to a director is with respect to his employment with the company or with respect to an independent professional service in order to determine the liability of GST on such payment.

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