Applicability of GST on Directors Remuneration

Last updated: 18 January 2021

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Quick Summary

The applicability of Goods and Services Tax (GST) on director's remuneration hinges on whether the director is considered an employee of the company. For executive directors who are full-time employees, GST is generally not applicable on salary. However, if they receive professional fees or are not treated as employees, GST will apply under the reverse charge mechanism. Non-executive and independent directors are typically not considered employees, meaning GST is applicable on their remuneration, also payable by the company via reverse charge.

Introduction

Director’s remuneration is determined by whether the Director is treated as an employee of the Company or not. For the director to be treated as an employee of the company, there must exist and employee-employer relationship between the two. In this post, we shall see the GST applicability on remuneration received by Executive, Non- executive and Independent Directors.

GST on remuneration of Executive Director:

An executive director is a whole time director of the company managing its day to day affairs. Hence such directors are generally considered as employees of the company. However, Executive directors earn remuneration both in the nature of salary as well as Professional fees/ Sitting fees. As per the CBIC circular, where the whole time director is the employee of the company, GST will not be attracted on such remuneration. However, if the director is not the employee or the remuneration is not paid in the nature of salary, GST shall be applicable on such remuneration and the company shall pay the GST liability under Reverse charge mechanism.

GST on remuneration to Non-Executive Director:

A non executive director do not look after the day to day affairs of the company full time. Hence, They cannot be considered as employee of the Company. Thus, GST is applicable on the remuneration to non- executive directors.

GST on Director s Remuneration: Employee vs. Non-Employee

GST on fees to Independent Directors:- Independent Directors are not related to the company. They only give their expert opinion to the board of directors when required. Hence any fees paid to independent directors attracts GST.

Points to remember:

The rate of GST applicable on Director’s remuneration is 18%.
The company must discharge the GST liability as applicable above under reverse charge mechanism.
Where a director is treated as an employee of the company, there must exist an employer-employee relation between the two, TDS must be deducted under section 192 of the Income Tax Act,1961 and the expense must be shown under the head salaries in the books of accounts. In other cases TDS must be deducted under section 194J of the Income Tax Act,1961.