The very purpose of setting up the concept of Authority for Advance Ruling under GST is to provide clarity and to remove ambiguity in terms of the unanswered question in GST law. It is a kind of knowing the correct interpretation of GST Act from the Government (i.e. Authority) itself which will help reduce disputes and cost of litigation.
For the past few days, there has been chaos among the trade created by the decision of Advance Ruling Authority for Rajasthan in the case of M/s. CLAY CRAFT INDIA PVT LTD (AAR No. RAJ/AAR/2019-20/33) wherein it was held that remuneration paid to full time Directors (Executive Directors) is liable for GST under Reverse Charge Mechanism under section 9(3) read with Notification No.13/2017-CT dated 28.06.2017.
Though the applicant submitted elaborately in the application substantiating his claim that the whole time Director is an employee of the Company and the relationship between the whole time Directors, who are managerial position and also involve in day to day activities of the company, and the Company is in the nature of Employee- Employer relationship. However, the Authority for Advance Ruling Authority, Rajasthan held that the service provided by the Director, including whole time Director, to the Company is liable for GST under Reverse Charge Mechanism. The said AAR chose to skip the findings/reasoning as to how a whole time Director does not fall within the term " Employee".
The said AAR Ruling put the trade at loss as to whether they should start paying GST on remuneration paid to whole time Directors under RCM and avail the same as ITC or they should wait for some more clarification from Govt./Appellate Forum.
Latest AAR Ruling says NO GST on Director's Salary:
Amidst the uncertainty caused by the Authority for Advance Ruling Rajasthan in the above case, now AAR , Karnataka , in a similar case , has given ruling which is contrary to AAR, Rajasthan. The trade and industry see this new AAR Ruling as NEED OF THE HOUR which gives a sigh of relief. Now let's discuss the Ruling given by the AAR, Karnataka in the case of Shri. Anil Kumar Agarwal, a whole time Director of a company (AR No. KAR ADRG 30/2020, daed 04.05.2020).
Fact of the Case:
Interestingly the fact of the case is not a question as to whether remuneration paid to full time director by the Company is liable for GST under RCM or not, as in the case of AAR, Rajasthan. In this case, the applicant being a unregistered person seeking Advance Ruling as to whether income received from various sources form part of the "Aggregate Turn Over" for the purpose of obtaining registration under section 25 of GST Act.
He stated in the application that he is in receipt of incomes under the following sources:
a) Partner's salary as partner from my partnership firm,
b) Salary as director from Private Limited company
c) Interest income on partners fixed capital credited to partner's capital account
d) Interest income on partners variable capital credited to partner's capital account
e) Interest received on loan given, Interest received on advance given
g) Interest acumulated along with deposit/ fixed deposit
h) Interest income received on deposit/ fixed deposit
i) Interest received on Debentures interest accumulated on debentures
k) Interest on Post office deposits
1) Interest income on National Savings certificate (NSC)
m) Interest income credited on PF account
n) Accumulated interest (along with principal) received on closure of PF account
o) Interest income on PPF
p) Interest income on National Pension Scheme (NPS)
g) Receipt of maturity proceeds of life insurance policies
r) Dividend on shares
s) Rent on Commercial Property
t) Residential Rent
u) Capital gain /loss on sale of shares.
The applicant wanted to know what are the incomes out of the above are to be includable in Aggregate Turn Over for the purpose of registration. The Authority for Advance Ruling, Karnataka, in the findings portions, recorded that income received from Sl.No.(c) to (p) above i.e interest income received from various sources are includable in aggregate turn over as the activities amount to supply as per section 7 of the CGST ACT.
However, while coming to salary received in the capacity of Director from a company, the AAR holds that there are two possibilities with regard to salary as a DIRECTOR. One is he may be an Executive Director and in this case he becomes an employee of the company and services provided by employee to employer is neither supply of goods nor supply of service in terms of Schedule III of CGST ACT.
Another possibility is that he may be a nominated director (non- Executive Director) and in this case, remuneration paid by the company to the Director is liable for GST under Reverse Charge Mechanism in terms of section 9(3) of CGST Act read with Notification No.13/2017-CT (Rate) dated 28.06.2017.
Since there is no documentary evidence produced by the applicant as to decide whether he is a Executive Director or a Non-Executive Director, the AAR, Karnataka went on to hold that the income received as salary to be includable in Aggregate Turn Over, if the Director holds a post of Non-Executive Director which is nothing but a non-committal judgment considering non-availability of records. The relevant portion of the Advance Ruling is re-produced hereunder.
"Salary received as Director from a Private Limited Company:
7.8 The applicant is in receipt of certain amount termed as salary as Director of a private limited company. Two possibilities may arise with regard to the instant issue of amount received by the applicant. The first possibility that the applicant is the employee of the said company (Executive Director), in which case the services of the applicant as an employee to the employer are neither treated as supply of goods nor as supply of services, in terms of Schedule III of CGST Act 2017
The second possibility that the applicant is the nominated director (non Executive Director) of the company and provides the services to the said company. In this case the remuneration paid by the company is exigible to GST in the hands of the company under reverse charge mechanism under section 9(3) of the CGST Act 2017, in the hands of the company, under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017
In the instant case the applicant has not furnished any documentary evidence such as copy of agreement between the applicant and the said private company, copy of appointment order, details of ESI, PF deductions etc., so as to decide whether the applicant is in receipt of salary as an employee or as an independent director. Thus in the absence of any documentary evidence, it is not possible to decide whether the amount received by the applicant is towards his services as an Executive Director or a Non-Executive Director.
In view of the above, the remuneration received by the applicant as Executive Director is not includable in the aggregate turnover, as it is the value of the services supplied by the applicant being an employee. Further if the applicant receives the remuneration as a Non-Executive Director, uch remuneration is liable to tax under reverse charge mechanism under section 913) of the CGST Act 2017, in the hands of the company, under entry no 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017. Thus the value of the said services of the applicant being a Non-Executive Director are includable in the aggregate turnover, as it is the value of the taxable services supplied by the applicant, though the tax is discharged by the private limited company, under reverse charge mechanism.
As per notification No.13/2017-CT(Rate) dated 28.06.2017 services provided by a Director to the Company is liable to GST and the same has to be paid by the Company under Reverse Charge Mechanism. Now the question is whether a remuneration paid to a whole time Director is covered under the above entry of the Notification. Before answering the question the relevant entry of the Notification is re-produced for ready reference.
Category of Supply of Services
Supplier of service
Recipient of Service
Services supplied by a director of a company or a body corporate to the said company or the body corporate.
A director of a company or a body corporate
The company or a body corporate located in the taxable territory
Here what is to be decided that whether the Director (including whole time Director) supplies any service to the Company or Body Corporate. Normally, the whole time Directors are holding Managerial positions and involved in day to day activities of the Company. Now the test has to be done whether such activities qualify as "Supply of Service" or not.
As per section 7 of CGST Act Supply means all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business . It is clear from the above that to qualify as supply under GST, the activity must consist of the following three components:
- The transaction must involve supply of goods or supply of services or both…
- The transaction must be for a consideration by a person
- The Transaction must be in the course or furtherance of business.
So far the activities of the Director (including whole time Director) is concerned, it satisfies all the three components and thus activity undertaken by a Director for the Company qualifies as SUPPLY under GST. Now, it is important to decide whether it is a supply of goods or a supply of services.
The terms services is defined in section 2(102) of CGST Act as Services means anything other than goods, money, securities…. Hence, it is clear that the activity undertaken by the Director of a company is very much classifiable under Supply of Services and since it qualifies as Supply of Services, GST is liable to be paid under RCM by the Company in terms of section 9(3) of CGST Act read with Notification No.13/2017-CT(Rate) dated 28.06.2017. But I am of the view that due to overriding effect of Schedule IIII to CGST Act, the said activity of the Director dos not qualify even as Supply for the purpose of CGST Act 2017 which is discussed in the following paragraphs.
Overriding effect of Schedule III:
There are three schedules to CGST Act 2017. First Schedule declares certain activities as supply even it is made without consideration. Second Schedule declares certain activities as "Either Supply of Goods or Supply of Services". This second schedule is clarificatory in nature only. However, third schedule declares certain activities as "Neither Supply of Goods or Nor supply of Services".
Section 7(2) starts with the word "NOTWITHSTANDING" hence, it is an overrides the very section of 7(1) which defines what is supply. Section 7(2) of CGST Act reads as:
7(2) Notwithstanding anything contained in sub-section (1),–
(a) activities or transactions specified in Schedule III ; or
(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.
Hence, any activity covered under Schedule III is not a supply under GST Act even it qualifies as Supply under section 7(1) of CGST Act. Schedule III contains the following activities.
1. Services by an employee to the employer in the course of or in relation to his employment.
2. Services by any court or Tribunal established under any law for the time being in force.
3. (a) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities;
(b) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
(c) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or a State Government or local authority and who is not deemed as an employee before the commencement of this clause.
4. Services of funeral, burial, crematorium or mortuary including transportation of the deceased.
5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
6. Actionable claims, other than lottery, betting and gambling.
Hence, if service provided by an Employee to an Employer in the course or in relation to his employment is outside the ambit of GST.
Now, it is clear that if a Director is an employee of the Company, remuneration paid to Director is not liable for GST. Since the term Director is not defined under CGST Act, reference has to be made from Companies Act,2013 where it is clearly defined who is Executive Director.
As per Rule 2(1)(k) of the Companies (Specification of definitions details) Rules, 2014 "Executive Director" means a Whole Time Director as defined in clause (94) of section 2 of the Act".
As per Clause 2(94) of Companies Act, 2013 "whole-time director"
includes a Director in the whole-time employment of the company.
A conjoint reading of the above two definitions mentioned under Companies Act,2013, it makes ample clear that if a person appointed as a Whole-time Director of a Company, he is said to be in whole-time employment of the company.
As rightly held by the AAR, Karnataka in the subject case, an Executive Director, who is normally holds managerial position and involves in day to day activities, is an Employee of the Company and thus GST is not applicable on remuneration paid to such Executive Director.