Levy of GST on Directors Remuneration

CA Nilesh Mahajan | Last updated: 13 December 2020

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The applicability of GST on director's remuneration has been a complex issue. Generally, services provided by an employee to their employer are not subject to GST. However, determining the employer-employee relationship for directors can be challenging, leading to differing interpretations. Recent clarifications from the CBIC, referencing the Companies Act and Income Tax Act, aim to resolve this confusion. Independent directors and directors not considered employees are liable for GST on their remuneration under the reverse charge basis, payable by the company. For directors who are employees, their remuneration is typically outside the GST net, provided TDS is deducted under Section 192 of the Income Tax Act. However, any additional professional fees paid to these employee directors, subject to TDS under Section 194J, will be liable to GST.

Applicability of tax on Directors Remuneration is one of the hotly contested issues in the GST era. Under Clause 1 of Schedule III of the CGST Act, 2017 services provided by an employee to the employer in the course or in relation to his employment is treated as neither supply of goods nor supply of services.

Accordingly, if the Director is working in the capacity of an employee, the remuneration received for services provided by him is outside the tax net. Here lies the catch. No set principles are defined in GST to determine the employer-employee relationship in each case and as such authorities take a contrary stand. The rulings passed by various Advance Ruling authorities has further compounded the issue.

Considering the prevalent confusion, CBIC (the 'Board’) has recently issued Circular No. 140/10/2020-GST dated 10 June 2020 to address the subject issue. Board has also relied upon provisions of the Companies Act, 2013 and the Income Tax Act, 1961 to address the issue

GST on Director s Remuneration: New Clarifications

It is broadly clarified as

- Independent Directors are not employees of the Company and as such remuneration paid to them is liable to tax under reverse charge basis in the hands of the Company.

- Remuneration paid to Directors (by whatever name called), who are not employees of the Company is liable to tax on reverse charge basis in the hands of the Company

- Remuneration paid to Whole-time Directors and other category of Directors who are employees of the Company is not liable to tax provided TDS is deducted under Section 192 of the Income Tax Act, 1961 on such remuneration.

- Where such Directors who are employees of the Company, are also paid some professional fees etc. in addition to regular salary paid to them, and TDS on such professional fees etc. is deducted under Section 194J of the Income Tax Act, 1961, the same is liable to tax in the hands of the Company.

We have provided the gist of the same in the Table below:

Table

Disclaimer: The content of this GST updates are solely for informational purpose. It dose not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this GST updates nor for any actions taken in reliance thereon.

FAQ :

It depends on the director's employment status. Remuneration to independent directors or those not considered employees is liable to GST on a reverse charge basis, payable by the company. Remuneration to directors who are employees is generally not liable to GST if TDS is deducted under Section 192 of the Income Tax Act.

Services provided by an employee to an employer are not considered a supply of goods or services for GST purposes. If a director is an employee, their remuneration is outside the GST net, provided specific conditions like TDS deduction are met.

Companies are liable to pay GST on remuneration paid to independent directors under the reverse charge mechanism, as these directors are not considered employees.

Remuneration paid to employee directors is generally not subject to GST. However, if they receive additional professional fees for which TDS is deducted under Section 194J of the Income Tax Act, these fees are liable to GST.

The CBIC has relied on provisions from the Companies Act, 2013, and the Income Tax Act, 1961, to clarify the employer-employee relationship and determine the GST applicability on director remuneration.