Taxability on remuneration paid to the Directors
The recent pronouncement by Authority for Advance Ruling (AAR) in the case of Clay Craft Private Limited has raised doubts in the industry is whether any amount paid to the directors shall be covered under Reverse Charge u/s 9(3). For this we need to understand the provisions relating to GST their application and relating definition and also other laws applicable to it.
Provisions relating to GST
• As per Section 7(1) of the CGST Act, 2017 provides inclusive definition of the supply such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course of furtherance of business.
• Section 7(2) of the CGST Act, 2017 provides for activities or transactions which would be treated neither as supply of goods nor a supply of services. Schedule III specifies such activities and includes 'services by an employee to the employer in the course of or in relation to his employment' in its ambit. Therefore, such activities cannot be considered as supply so as to leviable to GST.
• As per Section 9(3) of the CGST Act, Notification no. 13/2017- Central Tax (rate) in serial no 6 which state that S. no Category of Supply of Services Supplier of services Recipient of Services 6 Services supplied by a director of a company or a body corporate to the said company or body corporate. A director of a company or a body corporate. The company or a body corporate located in taxable territory.
Remarks: For applying the above-mentioned provision we need to understand three terms that is 'employee', 'director' and 'remunerations'.
These three terms has not been defined in the CGST Act which creates ambiguity in terms of charging. For this we have to follow the definition given in other acts. Definition as per Companies Act
• As per 2(34) of the Companies Act, 2013, 'director' means a director appointed by the board of the company. Also some directors nominated by Financial Institutions/Foreign Collaborators/Banks/investors to form part of the board of directors. Directors who are in whole time employment of the company or who are entrusted with day-to-day affairs of the company are termed as Executive Directors, while others are Non-Executive Directors. Thus, it can be inferred that non-executive directors, who are not entrusted with day-to-day affairs of the company cannot be treated as employee of the company.
• As per section 149(6) of the Companies act, 2013 an 'independent director' has been defined as a director not being a managing director or a whole-time director or a nominee director. The independent director do not work under the control and supervision of the company and therefore cannot be inferred that they are not employees of the company.
• As per section 2(78) of the Companies Act, 2013, 'remuneration' means any money or its equivalent given or passed to any person for services rendered by him and included perquisites as defined as Income tax Act. Therefore, salary paid to the directors shall be dealt as follows:
Type of Directors
- GST Implication Whole time Director Not leviable to GST.
- Managing Director Not leviable to GST.
- Executive Director Not leviable to GST.
- Non-Executive Director RCM applicable.
- Independent Director RCM applicable.
- Nominee Director RCM applicable.
Remarks: Apart from salary other remuneration such as sitting fees, commission shall be chargeable to GST on RCM basis. AAR views In the case of Clay Craft India Pvt Ltd it was held that consideration in form of salary and commission paid to the directors of the company is against the services rendered by them to the company and the company is recipient of such services and directors are the supplier.
• Question raised before Rajasthan AAR
i) Whether GST is payable on RCM basis on salary paid to the directors of the company who is paid salary as per contract?
ii) Whether GST applicability will change if the said director is also apart-time director of any other company?
• Applicants view
The directors are treated as par with other employee of the company as far as employment is concerned. The company is deducting TDS on their salary and PF laws are also applicable to their services. Therefore, in all practical purpose, these directors are the employees of the company and are working as besides being Director of the company. Further, it was said that salary that is paid to the directors is being booked under 'Income from Salary' by the Directors in their personal Income Tax returns. The said company is already paying GST under RCM on any commission paid to their Director as such amount pertain to the service provided by them in the capacity as a Director.
• Decision of AAR
The AAR held that directors are not the employees of the company, consequently, GST will be applicable on RCM basis. It emphasized that the director is the supplier of services and the applicant (company) is the recipient of services. Services rendered by Director to the company for which consideration is paid to them, under any head, is chargeable to GST on RCM basis. Therefore, in respect of both the questions raised above, the applicant shall be liable to pay GST.
Decisions of Rajasthan AAR has considered only on the Notification no 13/2017 without considering the fact the underlying principles of the provisions. With due respect this ruling need reconsideration. However, advance rulings are binding only in respect of the applicant who has sought it and has only persuasive value for others. It is imperative for taxpayers to timely restructure such transactions to avoid any potential future liability.