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Directors remuneration

Tara Khandelwal (Student CA Final ) (293 Points)

02 February 2013

Could someone explain service tax on directors remuneration? what is the date of applicability of this service?

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shankar (CA, CS Final) (243 Points)
Replied 02 February 2013

Dear TARA,

All the companies are required to pay service tax under reverse charge on any remuneration paid to its directors whether in the form of money or otherwise and threshhold limit of Rs. 10 lakhs will not be applicable on such case.

As per the amended Notification No. 30/2012-ST dated 20.06.2012, the service provided by a director as a service to the Company which is leviable to Service Tax has to be paid by the service receiver. The extent of service tax payable by the recipient is 100%.

In other words the Directors of a Company are liable to Service Tax, but the same will be paid by the company.

Service tax will be additional cost to the company and company may require taking an approval to accommodate service tax within the ceiling of overall Directors’ remuneration. Since as per Section 309 of the Companies Act, the remuneration paid to Directors cannot exceed the limit of 1% profit of the company when the company has a Managing / Whole Time Directors / Managers or 3% of the profit of the company if the company does not have a Managing / Whole Time Directors/ Managers, as the case may be. The Company can pay remuneration at a rate exceeding one percent or, as the case may be, three per cent of its net profits, with the approval of the Central Government.

But The Ministry of Corporate Affairs has clarified that if the Service Tax is paid by the Company, it will be deemed to be a part of the remuneration and would increase the amount of remuneration. And thus any increase in remuneration of Non-Whole Time Directors solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under section 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit of the company, as the case may be, in the financial year 2012-13.

For a trading company service tax so paid as recipient of service, will be cost to the company and for the For non-trading company service tax so paid may be available as credit if it qualifies as eligible input service.

The said amendment has been brought by the Notification No.44/2012 - ST dated 07.08.2012 So now in the absence of mention of any date in the notification, it shall be effective from the date of publication in official gazette i.e. 7th August, 2012. For services provided between1st July, 2012 to 6th August, 2012, directors will be liable to charge service tax since there was no reverse charge mechanism for the said case by then.

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