ARE DIRECTORS LIABLE TO SERVICE TAX AND TAX AUDIT AS PER UNION BUDGET 2012-13?
Till the date of budget, there is always confusion on treatment of director’s remuneration. There is conflict about whether it is salary income or it is a business income chargeable under the head business and profession. In this union budget, we have got a new clause u/s 194(J) that is 194(J)(1)(ba) that defines Any remuneration or commission paid to director of the company are liable to tax deduction at source at the rate of 10%. In my point of view, this will end the debate on TDS liability on director remuneration.
Now, Section 194(J) is considered for profession and technical services. By inclusion of director remuneration, it signifies that remuneration or commission paid to directors must be professional services. Then director remuneration must be considered as business income while classification of income.
If government intent to consider the director remuneration in business income, then 2 questions arises:-
1. If director remuneration exceed the limit u/s 44AB i.e. 25 lacs Rupees, whether directors are liable to Tax Audit in their individual capacity?
2. By introduction of negative list of service tax, whether services provided by the directors to the company are comes in the net of service tax?
As we all know, if the turnover of any professional cross the threshold limit u/s 44AB i.e. 25 lacs for AY 2013-14, he is liable to tax audit. By inclusion of director remuneration in professional and technical services for TDS purpose, it is clear that government intent to charge such income in the head of Income from business and profession. Then section 44AB becomes applicable to such entities and even if any person is getting only director remuneration from any company which exceed the threshold limit may liable to tax audit.
Our second point of discussion comes from negative list of services, which is exempt from service tax. Till date, we have list of services that are taxable to service tax. Now by introduction of negative, any services provided by any service provider unless exempt in negative list is taxable under the net of service tax. Now under the income tax act, we are considering the director remuneration as a result of professional services provided by director to the company. Now my point of view is that, if director remuneration exceeds the threshold limit of service tax, then whether director is liable to pay the service tax as he is providing professional services to the company.
If we considering that point of view, then it will be create a problem in compliance of law. In present, even a middle scale company pays director remuneration to a single director which will exceed the limits of tax audit and service tax. Assume if such interpretation is considered what will happen, every director of the company will get a separate service tax number and he have to get tax audit report even if he is only a director in the company. In case, he is director in more than one company and total director remuneration will exceed the limits then also he has to get service tax number and get his books audited.
Government should come with the clarification otherwise another debate will start.
Thanks & Regards
CA Prashant Gupta