Goods and Services Tax [GST] has been imposed on the "supply of goods or services". That means for the purpose of imposition of GST there has to be supplied, if there is no supply then no GST will be imposed. However the government has specified the certain activities in Schedule III which shall be treated neither as a supply of goods nor a supply of service. One of them is as under.
"Services by an employee to the employer in the course of or in relation to his employment"
Further, GST shall be paid by forward charge (i.e. Supplier shall liable to pay GST) or Reverse Charge (i.e. Receiver shall liable to pay GST). The government has specified the certain goods & service, GST on which shall be paid by Reverse Charge (i.e. Receiver shall be liable to pay GST) one of them is as under.
"Services supplied by a director of a company or a body corporate to the said company or the body corporate"
Now before understanding the matter under the subject we need to know some definition of Director as per Company Act, 2013.
Director: As per Section 2(34) of the Company Act, 2013 "Director" means a director appointed to the Board of a company.
Managing director: As per Section 2(54) of the Company Act, 2013 "Managing director" means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.
Whole-time director: As per Section 2(94) of the Company Act, 2013 "Whole-time director" includes a director in the whole-time employment of the company.
Independent directors: The definition of "independent directors" under section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it amply clear that such director should not have been an employee or proprietor or a partner of the said company, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.
Various doubts have been raised as to whether the remuneration paid by companies to their directors falls under the ambit of entry in Schedule III of the Central Goods and Services Tax Act, 2017 i.e. “services by an employee to the employer in the course of or in relation to his employment” or whether the same are liable to be taxed in reverse Charge i.e. "Services supplied by a director of a company or a body corporate to the said company or the body corporate".
In order to ensure uniformity in the implementation of the provisions of the law across the field formations, government has issued Circular No. 140/10/2020 Dt. 10th June, 2020 for Clarification in respect of levy of GST on Director’s remuneration.
For the purpose of this matter company need to identify whether directors are employees of the company or not. To ascertained whether a director, irrespective of name and designation, is an employee or not, it would be pertinent to examine whether all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service”) or is there any element of “contract for service”.
Sometime director who has also taken an employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other on the basis of the contractual relationship of master and servant with the company, i.e. under a contract of service (employment) entered into with the company.
Further treatment of the Director’s remuneration is also present in the Income Tax Act, 1961 wherein the salaries paid to directors are subject to Tax Deducted at Source ('TDS') under Section 192 of the Income Tax Act, 1961 ('IT Act'). However, in cases where the remuneration is in the nature of professional fees and not salary, the same is liable for deduction under Section 194J of the IT Act.
If Directors are not employees of the Company:
In respect of such directors who are not the employees of the said company, the services provided by them to the Company, in lieu of remuneration as the consideration for the said services, are clearly outside the scope of Schedule III of the CGST Act and are therefore taxable.
Accordingly, it is hereby clarified that the remuneration paid to such directors, by whatever name called, who are not employees of the said company, is taxable in hands of the company, on reverse charge basis.
If Directors are employees of the Company:
It is clarified that the part of Director’s remuneration which are declared as "Salaries" in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.
It is further clarified that the part of employee Director's remuneration which is declared separately other than "salaries" in the Company's accounts and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable in the hand of the Company on reverse charge basis.
9983:- Other professionals, technical and business services.