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Scope of Taxability of managerial remuneration

CA Amrita Chattopadhyay 
on 22 June 2020

LinkedIn


A director plays various roles within a company. He can act as agent of the company. Contracts entered into by a Director are binding on the company only if they are within his actual authority or if the articles of association of the company, or the company’s bye-laws.

As authorized representatives of the company. This may be done by signing under the seal of the company, and specifically mentioning along with the signature of the individual that document is signed by the authorized signatory of the company.

As officer in default. Where a company specifically does not have a Managing Director, Whole-time Director or Manager or where no other director is specified, all the directors are deemed to be "Officer in Default".

There are restrictions regarding the payment of remuneration to the Directors for several reasons. Some of the important reasons are diversion of corporate funds / shareholders fund for personal use of Directors. Companies Act, 2013 has imposed several restrictions on the remuneration paid to the Directors. Section 197 of the Companies Act, 2013 prescribed the maximum ceiling for payment of managerial remuneration by a public company to its managing director whole-time director and manager which shall not exceed 11% of the net profit of the company in that financial year. The profit of the company in this case has to be calculated as prescribed under Section 198 of Companies Act, 2013. The remuneration payable to any one managing director or whole-time director or manager shall not exceed 5% of the net profits of the company and if there are more than one such director remuneration shall not exceed 10% of the net profits to all such directors and manager taken together.

If, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including managing or whole time director or manager, any remuneration exclusive of any fees payable to directors except in accordance with the provisions of Schedule V and if it is not able to comply with Schedule V, with the previous approval of the Central Government.

Taxability of managerial remuneration

Nomination and Remuneration Committee

Companies Act 2013 has introduced Nomination & Remuneration Committee for certain classes of companies as per Section 178 of Companies Act, 2013 read with Rule 6. The committee assists the board by reviewing and making recommendations in respect of remuneration policies and framework for Board and Executive committee. The main function of the Remuneration Committee includes Handling matters that relate to the terms and conditions of employment, remuneration payable to managerial personnel and their removal, Recommending the Board, the policy relating to remuneration for Directors, KMPS and other employees taking into account their performance. The main objective of the committee is to ensure that the remuneration paid to the Directors are appropriate and sufficient for motivating and retaining the Directors, Remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goal.

Director of Private Limited Company (not being subsidiary of Public Limited company)

The company act restricts the remuneration to the Director of Public Limited Company. However, there is no restriction placed on the Private Limited Company to pay remuneration to the Directors. Although there is no direct provisions controlling on payment of remuneration to Directors in a Private Limited Company, there are certain provisions which regulate the payment made to Directors. They are:

Articles for Association:

If a Company has an Article on Appointment and mechanism to make the payment of remuneration to a Director, the Company has to abide by such regulation. But this should be in addition to the conditions under the provisions of Companies Act, 2013 and other laws.

Schedule VI

As per Schedule VI – Part II (4), the Profit & Loss Account shall contain by way of note, the detailed information with respect to remuneration, commissions payable, other allowances and commission, perquisites or benefits in cash or in kind, pension, etc.

Irrespective of the nature of remuneration paid to the Directors, the same needs to be disclosed under the Notes to Accounts of the Final Accounts.

Taxability of remuneration under the Income Tax Act, 1961

Remuneration, Salary, Commission, Perquisites, Sitting Fees, etc., whatever the form of payment, it is taxable under the Income Tax Act, 1961 either under the head "Income from Salary" (if Director is an employee) or under the head "Profits from Business or Profession" (if Director is an agent – supplier of services) in the receiver's hand. Tax is deductible at source under Section 192 in case of Salary and Section 194J in case Director is acting as agent – supplier of services.

Taxability of remuneration under GST

Circular no.140/10/2020- GST on 10/06/2020 clarifying the issue of leviability of GST on the remuneration paid to the Directors.

As per the circular, the Directors has been classified under two categories:

a) Independent directors defined as per Section 149(6) of the Companies Act, 2013 or other directors like the nominee directors, alternate directors who does not have employment term with the said company.

b) Whole-time directors including the Managing Director who are employees of the company.

As per the circular, it is clarified that directors, who are not the Employee of the Company, it is clarified that is the remuneration paid to such independent directors, or those directors, by whatever name called, who are not employees of the said company, is taxable in hands of the company, on reverse charge basis.

 

If the Director is in employment, it is clarified that the part of Director’s remuneration which are declared as "Salaries" in the books of a company and subjected to TDS under Section 192 of the IT Act, 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 CGST Act, 2017.

Further clarification is provided that employee 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.

In the above cases, it is on the company to pay GST for the remuneration paid to the Directors.

 

GST leviable on Director’s remuneration

Director Type

Nature of payment

Taxability

Independent Director

Any kind of payment

Taxable under Reverse Charge mechanism

Whole time or Managing Director

Paid as salary and TDS deducted under S.192 of Income Tax Act

Not Taxable

Whole-time or Managing Director

Paid as Professional fees and TDS deducted under S.194J of Income Tax Act

Taxable under Reverse Charge mechanism

All kind of Directors

Sitting Fees

Taxable under Reverse Charge mechanism


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