Good and Service Tax Act ('GST') was introduced in India from July 1, 2017 and is a single unified tax created by amalgamating provisions from erstwhile taxes like VAT, Service Tax, Excise etc. One of the legacy provisions which is included under GST from Service Tax is the concept of Reverse Charge mechanism ('RCM') wherein the receiver of service is liable to deposit tax with the Government Treasury for services received from service provider.
Section 9(3) and section 5(4) of the Central Goods and Service Tax Act, 2017 ('CGST Act') and Integrated Goods and Service Tax Act, 2017 ('IGST Act') respectively imposes liability on recipient of notified goods and services to pay tax on reverse charge basis. The services were notified vide Notification No. 13/2017-Central Tax (Rate), dated 28-6-2017(as amended). As per S.No 6 of the said notification, a company or a body corporate located in the taxable territory is liable to pay GST on RCM basis on services received from its directors.
Common understanding of GST applicability under RCM on Director's Remuneration:
- Services supplied by the director in the capacity of an employee – If there is an employer-employee relationship between the director and company then the company would not be liable to pay GST under RCM on the remuneration paid to the director as this activity or transaction gets covered under clause 1 of Schedule III to CGST Act which provides exclusive list of activities which shall neither be treated as supply of goods nor supply of services. Such services remain outside the purview of GST and hence will not be taxed on RCM basis.
- Services supplied by the director in capacity of a professional - If sitting fees, travelling and incidental expenses, commission or other remuneration is paid to independent director, who is not the employee of the company, for the purposes of attending board meetings, then such services supplied by director are in the nature of professional services, such supply will attract GST under RCM.
The above was a well-settled position and corporates were following this.
However, confusion and unrest occurred among the corporates with the pronouncement of the two advance rulings, which are discussed below:
- Ruling pronounced by the Karnataka GST AAR, in case of M/s Alcon Consulting Engineers (India) Pvt. Ltd. dated 25thSeptember 2019, it was ruled that consideration paid by the company to its directors will attract GST under reverse change mechanism due to the reason that the services provided by the Directors to the company are not covered under S.No 1 of the Schedule III to the CGST Act as director is not the employee of the company.
- In another ruling pronounced by Rajasthan GST AAR, in the case of Clay Crafts India Pvt. Ltd dated 20th February, 2020, it was ruled that as Notification 13/2017 Central Tax (Rate), dated 28-6-2017 (as amended) has specifically included services supplied by directors on which GST under RCM will be payable therefore consideration paid to Directors by the company will be taxed accordingly.
Now to put an end to all the doubts and confusion over applicability of GST on services supplied by directors to companies, the Government has issued Circular No - 140/10/2020 – GST dated 10th June 2020(Circular). Clarification made by the Circular are based on below mentioned legal positions:
- As per definition given under section 2(94) of the Companies Act, 2013, a whole time-director may be a person who is not an employee of the company.
- Independent director as defined under section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it amply clear that such director should not have been an employee or proprietor or a partner of the said company, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.
- It has been deliberated in various courts that a director can function in dual capacities with a company – one wherein he has also entered into an employment contract with the company and secondly where he is working as a director of the company.
- Income Tax Act, 1961 ('IT Act') also gives two different treatments to the remuneration received by the directors wherein the salaries paid to directors are subject to Tax Deducted at Source ('TDS') under Section 192
of the IT Act and other remuneration received like sittings fees, conveyance, boarding, lodging paid for attending Board meetings etc are liable for deduction under Section 194J.
Considering the above positions it has been clarified that the part of Director's remuneration which is declared separately 'other than salaries' in the Company's accounts and subjected to TDS under Section 194J of the IT Act as 'Fees for professional or Technical Services' shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable and covered under reverse charge mechanism in terms of Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017(as amended), the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it.
Now, it is amply clear that in case of directors the part of remuneration accounted for as salaries in the books of accounts and TDS deducted under Section 192, GST is not applicable therefore no liability under RCM.