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
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:
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