The CBEC has issued Notification No. 45/2012-ST dated 7-8-2012, amending the Notification No. 30/2012-ST dated 20-6-2012 and expanded the scope of reverse charge mechanism. With effect from 7-8-2012, services provided by the director to the company will be covered under the reverse charge mechanism. We have summarized frequently asked question(s) in this regard for easy understanding:
Query: Is service tax applicable for services provided by all Directors of a Company?
Reply: Service provided by Managing and Whole-time Directors/ Executive Directors (those who are under employment with the Company) are governed by the exclusion clause contained in the definition of ‘service' under Section 65B (44) (b) which provides that service provided by employees to their employers in the course of or in relation to employment are exempt from service tax.
Service provided by Part-time/ Expert/ Independent/ Nominee directors, etc., (those who are not under employment with Company), are in the nature of providing their professional/expert services to the company. Hence, the said Services would be chargeable to Service tax under Reverse charge by the Company w.e.f 07.08.2012.
Query: What will be the service tax liability of the Directors for the period July 1, 2012 to August 7, 2012?
Reply: Notification No. 45/2012 is effective from 07.08.2012 i.e. date of Reverse charge mechanism will be effective. In other words, Service provided by Part-time/ Expert/ Independent/ Nominee directors, etc., (those who are not under employment with Company) to Company will be taxable from 1st July 2012 to 6th August 2012 in the hands of said Director as there was no reverse charge mechanism for stated period.
Query: Whether the Directors have to obtain registration and pay service tax for the month of July 2012?
Reply: Yes, it looks like that such Directors providing taxable services to the company will have to obtain registration and pay service tax for the month of July, 2012 and for the six days of August, 2012.
It may be noted that services provided by the directors was not taxable up to July 1, 2012. However, if the value of other taxable services rendered by them during Financial Year 2011-12 is less than Rs. 10 lakhs, they can claim exemption up to Rs. 10 lakhs during 2012-13 if the value of services provided by them to the companies and other taxable services, if any, provided by them, is not exceeding Rs.10 lakhs. This exemption is as per Notification 33/2012 dated 20.06.2012 and subject to the conditions prescribed therein.
Query: Whether the service tax thus paid by the Company under reverse charge w.e.f 07.08.2012 can be availed as Cenvat credit?
Reply: Eligibility of Cenvat credit of service tax is to be decided with reference to the definition of input service under the Cenvat Credit Rules, 2004. Normally, the services provided by Directors should be an eligible input service for a manufacturer or a service provider and Cenvat Credit of same would normally be available subject to other conditions being fulfilled as per Cenvat Credit Rules, 2004.
Query: What is the portion of service tax payable by the Company under reverse charge?
Reply: Entire service tax liability will have to be paid by the Company receiving the services from Directors (those who are not under employment with Company) w.e.f 07.08.2012.
Query: What is point of taxation under reverse charge?
Reply: Rule 7 of Point of Taxation Rules, 2011 states that POT under reverse charge would be date of Payment provided payment is made within 6 months from the date of invoice otherwise POT would be Date of Invoice.
Query: What is the document on which Cenvat credit can be taken by the Company? Whether directors would also be required to issue an invoice?
Reply: In case of service provided by Directors, the tax challan evidencing payment of service tax by the service recipient would be the relevant document to avail Cenvat Credit.
It is advisable that the Directors must raise an invoice within 30 days of completion of the service as per Service tax Rules, 1994 to have clarity to decide the POT provisions.
Query: Whether Service tax paid by the Company under reverse charge will impact on remuneration to be paid to the Non-whole time directors of a Company under the Companies Act?
Reply: As per Section 309 of the Companies Act, the remuneration paid to Directors cannot exceed the limit of 1% profit of the company when the company has Managing / Whole Time Directors / Managers or 3% of the profit of the company if the company does not have a Managing / Whole Time Directors/ Managers, as the case may be. The Company can pay remuneration at a rate exceeding 1% or, as the case may be, 3% of its net profits, with the prior approval of the Central Government.
Now, non-whole time directors are not exempted from the levy of service tax and the company to which they are providing their services has been made liable to pay service tax as a service recipient. The question that arises is if the company is already paying 1% or 3% to the Directors and if they additionally pay the Service Tax, will it amount to paying more than 1% and 3%?
The Ministry of Corporate Affairs has clarified vide General Circular No. 24/2012 dated August 9, 2012 that any increase in remuneration of Non-Whole Time Director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under section 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit of the company, as the case may be, in the financial year 2012-13.
Bimal Jain FCA, ACS, LLB, B.Com (Hons)