Salaries paid to company directors not to attract GST

After a few contradictory judgments CBIC Clarifies that Salaries paid to company directors not to attract GST

In the Case of M/s Alcon Consulting Engineers (India) Pvt. Ltd. (Karnataka AAR) dt. 15-2-2019, it was held that the services provided by the Directors to the Company are not covered under clause (1) of the Schedule III to the CGST Act, 2017 i.e. “services by an employee to the employer in the course of or in relation to his employment” as the Director is not the employee of the Company. The consideration paid to the Director is in relation to the services provided by the Director to the Company and the recipient of such service is the Company as per clause (93) of section 2 of the CGST Act and the supplier of such service is the Director.

Further, the AAR stated that these services are liable to Reverse charge mechanism(RCM) under Entry No. 6 of Notification No. 13/2017- CTR dt 28-6-2017.

Similar views were upheld in the case of M/s Clay Craft India Pvt. Ltd. (Rajasthan AAR) dt. 5-2-2020.

Contrary views were taken in the case of M/s Anil Kumar Agrawal (Karnataka AAR) dt 4-5-2020, where it was contended that since the director is an executive director, hence services rendered by him will come under the purview of Clause (1) of the Schedule III to the CGST Act, 2017.

Now, CBIC has issued a Clarification vide Circular No. 140/10/2020-GST dt 10-6-2020, which states that we need to undertake the following steps to determine whether GST would be leviable on Director Remuneration or not – 

Step 1: We need to check whether the director is an employee of the company or not.

If Director is an employee – Then it will be covered under clause (1) of the Schedule III to the CGST Act, 2017 and no GST would be leviable.

If Director is not an employee – Then services rendered by him shall be exigible to GST and Company will have to pay tax on RCM under Entry No. 6 of Notification No. 13/2017- CTR dt 28-6-2017.

Step 2: To check whether a director is an employee of the company, further check whether director is an Independent Director or whole-time director.

If Director is an Independent Director - The definition of “independent directors” 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. 

Thus, remuneration paid to independent directors is taxable in hands of the company, on reverse charge basis.
If Director is a Whole Time Director - The definition of a whole time-director under section 2(94) of the Companies Act, 2013 is an inclusive definition, and thus he may be a person who is not an employee of the company.

Conclusion - Whole time director may or not be an employee of the company.

Step 3: To check whether a whole-time director is an employee of the company, further check whether company is deducting TDS under sec 192 or sec 194J of the IT Act.

If Salary paid to Director is subject to TDS under Sec 192 of the IT Actas Salaries – Such remunerations are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.

If Salary paid to Director is subject to TDS under Sec 194J of the IT Act as Fees for professional or Technical Services– Such remunerationsshall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable. Further, in terms of Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.