There was ample scope of doubt and confusion regarding whether GST would be leviable on those Directors' remuneration who are employees of the company where they are directors! Because, according to the entry no. 6 of Notification No. – 13/2017 – Central Tax (Rate) dated 28.06.2017, a company or body corporate shall pay GST on reverse charge basis on the amount of remuneration paid or payable to directors of the said company or body corporate and on the other hand Schedule III of the CGST Act, 2017 specifies that no GST is leviable on services by an employee to the employer in the course of or in relation to his employment.
Therefore, entry no. 6 of the said notification and the schedule III of the CGST Act, 2017 seem to be contradictory to each other. Because, many a cases although being a director, he serves the company/body corporate as an employee. In such a case, the relation between company and director is of master and servant.
One point is crystal clear that where employer and employee relationship do not exist between company and its director, company has to pay GST on director's remuneration on reverse charge basis.
Before analyzing the CBIC Circular we should look at the definitions of directors given in the Companies Act, 2013.
If we analyze the definition of independent director as have been described u/s 149(6) of the Companies Act, 2013 read with Rule 12 of Companies (share capital and debentures) Rules, 2014, it makes amply clear that a person can't be an independent director and also an employee of the company simultaneously.
Whole-time Director {Sec. 2(94)}: Whole-time director includes a director in the whole time employment of the company.
Definition of whole-time director given in the Companies Act, 2013 is an inclusive definition. Therefore, whole-time director may also be an employee of a company. Further, although for specific purpose, Rule 12 of companies (share capital and debentures) Rules, 2014 considers whole time director as an employee of the company.
An analysis of the circular
Every company has to pay GST on reverse charge basis on remuneration paid to its independent and other directors who are not employees of the company. Because, it is outside the scope of schedule III of the CGST Act, 2017.
To determine whether a director is an employee of the company, irrespective of his name or designation following points shall be considered:
- Definitions/descriptions given in the Companies Act, 2013. Say for an example, independent director can't be an employee of the company.
- Whether duties/activities performed by the director are in the course of employer-employee relation?
- Whether remuneration paid to director is subject to TDS, if applicable considering the amount of remuneration, u/s 192 of the Income Tax Act, 1961?
- Whether remuneration paid to director has been taken under the head salaries in the books of accounts of the company?
Where answers to serial no. (ii), (iii) and (iv) are affirmative, such director is to be considered as an employee of the company. Therefore, it is within the scope of schedule III of the CGST Act, 2017. Hence, no GST is leviable on remuneration paid to such director.
Notes: (i) Section 192 of the Income Tax Act, 1961: TDS provisions on salary, (ii) Section 194J of the Income Tax Act, 1961: TDS provisions on fees for professional or technical services.
It has further been clarified that the part of director's remuneration which is declared under any head other than salary in the books of accounts of the company and subjected to TDS u/s 194J of the Income Tax Act, 1961, shall be treated as fees for consideration of providing services. Therefore, such remuneration is outside the scope of schedule III of the CGST Act, 2017. In such a case, company has to pay GST on reverse charge basis on remuneration paid to directors.
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