The issue of taxability on director's remuneration always remain in controversy under the Service Tax as well as Goods and Service Tax Regime. Pointless to say that controversy always arises due to ambiguity in provision and lack of proper clarification. However, in both scenario it is very much clear that the service provided by director being employee of the company excluded from ambit of 'service' in the "Service Tax" regime and cannot be treated as supply of service in the 'Goods and Service Tax' regime. Eventhough after this clarification, department has issued several show cause notice with demand of tax.
The Ministry of Finance, Department of Revenue issued a circular No. 140/10/2020-GST Dated 10.06.2012 to clarify the issue of taxability related to Directors remuneration. This paper is an attempt to examine the issues so as to explain some of the points related to present circular dated 10.06.2020 issued by Ministry of finance in respect to taxability of directors' remuneration.
Basically the circular examined taxability of remuneration to directors under two categories:
- Remuneration paid by companies to the independent directors defined in terms of section 149 (6) of the Companies Act, 2013 or those directors who are not the employees of the company.
- Remuneration paid by companies to the whole-time directors including managing director who are employees of the said company.
Before examination of the aforesaid categories, it is pertinent to mention here that the director of company can be employee of the company. Further, service provided by director to company being employee in the course of employment is not taxable supply as it falls under the ambit of entry in schedule III of the CGST Act, 2017. The director can be considered as an employee in following circumstances:
- Director remuneration need to be declared as "Salaries" in the books of the company.
- The salary subjected to TDS under Section 192 of the Income Tax Act, 1941.
Now let us examine, the remuneration to directors of the aforesaid two categories in terms of circular:
Independent Director or who are not the employee.
The circular at para 4.1 (b) referred the definition of "Independent Director" as per Section 149 (6) of the Companies Act, 2013. The sub-para (b) says as under:
b) 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.
A bare perusal of the aforesaid definition referred in the circular, makes it clear that "Independent Director" cannot be employee of the said company. Being so the service provided and remuneration received is taxable and clearly outside the scope of Schedule III of the CGST Act, 2017.
The directors who are not employee of the company their services are liable for tax under reverse charge mechanism. The director's remuneration need to be declared separately other than 'salaries' head in the company's books and accounts subjected to TDS under section 194J of the IT Act, 1961. The services provided by theses directors may fall under head of "fees for professional or Technical service".
Whole-time directors including managing director who are employees.
It is already explained in the above para that the directors who are working as an employee of the company their remuneration cannot be tax under reverse charge mechanism. The circular explained that the directors whose remuneration declared as "salaries" in the books of company and subjected to TDS under Section 192 of the IT Act are not taxable being consideration for services by an employee to employer in the course of or in relation to his employment.
Taxability under both situation.
The present circular also examined the situation under which, a director can provide services in dual capacities to company, which is as under:
- As a director of the company.
- On the basis of contractual relationship i.e. under a contract of service.
In the aforesaid dual capacities, as per circular, same principle shall be applied for the purpose of taxability on remuneration.
The part of director remuneration which are declared as 'Salaries' in the books of a company and subjected to TDS under section 192 of the IT Act, will not be taxable being consideration for services by employee to employer.
The part of directors remuneration which is declared separately other than 'salaries' in the company's account and subject to TDS under 194J of the IT Act as fees for professional or technical services shall be treated as consideration for providing services and liable for tax under reverse charge mechanism.
Conclusion:
The department through present circular tried to clarify the ambiguity regarding the taxability of director's remuneration.
In my view, this circular has almost resolve the present controversy and it will help the taxpayers in proper compliance of GST Law.
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