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Nirmit Choraria (CA Final)     11 August 2012

Service tax on director remuneration..???

Now recently ammendment about service tax on director remuneration. Notificatio No. 45/2012.

1) It is applicable Exemption limit 10 lac for service tax on director remuneration? 

2)Can every company must take service tax number and pay service tax for payment to director remuneration?

3) When director Remuneration paid less than 10 lac, it required to take service tax number. Ammendment say that " director remuneration is liable to service tax and respective company is liable to pay ST under reverse charges @ 100%".
What is exect meaning about that?



 19 Replies

CA Unnikrishnan Nair N

CA Unnikrishnan Nair N (Chartered Accountant)     11 August 2012

No service tax is payable if the director is employee of the company say MD/WTD/ED. In other cases directors remuneration is liable to service tax under reverse tax. Basic exemption of Rs.10L is not availble when reverse tax mechanism is applicable.

2 Like
Savan Somani

Savan Somani (Corporate Manager)     11 August 2012

BRIEF: 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.

 

 

Nature of service

% of ST payable by service Provider

% of ST payable by service Recipient

Services  by a director of a company to the said company

Nil

100%

 

 

INTRODUCTION: All the companies are required to pay service tax under reverse charge. Threshold exemption limit of Rs 10 lacs is not available for services taxable under reverse charge.Thus, the employer- employee relationship between the director of a company and company may be created either by a service agreement or by the articles of the company themselves.Hence, the remuneration paid to director in accordance with the terms of the salary contract can be treated as salary.

 

CONCLUSION : There is distinction between salary and remuneration. TDS on salary paid to directors is deductible under section 192 while TDS on any remuneration, fees, commission etc. in a form other than salary is deductible under section 194J (1) (ba). Following clarification is given by CBDT in the Memorandum explaining the provision of Finance Bill, 2012. Under the existing provisions of the Income-tax Act, a company, being an employer, is required to deduct tax at the time of payment of salary to its employees including Managing director/whole time director. However, there is no specific provision for deduction of tax on the remuneration paid to a director which is not in the nature of salary. It is proposed to amend section 194J to provide that tax is required to be deducted on the remuneration paid to a director, which is not in the nature of salary, at the rate of 10% of such remuneration. However it is mandatory for all NED Director to issue Invoice as now they are covered under the Service Tax Net though currently they are not charging as per the Amendment. 

SAVAN SOMANI, Corporate Manager Taxation

 

3 Like
Savan Somani

Savan Somani (Corporate Manager)     11 August 2012

BRIEF: 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.

                          

 

Nature of service

% of ST payable by service Provider

% of ST payable by service Recipient

Services  by a director of a company to the said company

Nil

100%

 

 

INTRODUCTION: All the companies are required to pay service tax under reverse charge. Threshold exemption limit of Rs 10 lacs is not available for services taxable under reverse charge.Thus, the employer- employee relationship between the director of a company and company may be created either by a service agreement or by the articles of the company themselves.Hence, the remuneration paid to director in accordance with the terms of the salary contract can be treated as salary.

 

CONCLUSION : There is distinction between salary and remuneration. TDS on salary paid to directors is deductible under section 192 while TDS on any remuneration, fees, commission etc. in a form other than salary is deductible under section 194J (1) (ba). Following clarification is given by CBDT in the Memorandum explaining the provision of Finance Bill, 2012. Under the existing provisions of the Income-tax Act, a company, being an employer, is required to deduct tax at the time of payment of salary to its employees including Managing director/whole time director. However, there is no specific provision for deduction of tax on the remuneration paid to a director which is not in the nature of salary. It is proposed to amend section 194J to provide that tax is required to be deducted on the remuneration paid to a director, which is not in the nature of salary, at the rate of 10% of such remuneration. However it is mandatory for all NED Director to issue Invoice as now they are covered under the Service Tax Net though currently they are not charging as per the Amendment. 

SAVAN SOMANI, Corporate Manager Taxation

1 Like
shivani

shivani (consultant)     11 August 2012

Dear sir

Please explain in detail

1 Like
SIDDHARTH KOTHARI

SIDDHARTH KOTHARI (N.A)     12 August 2012

HI .......... NIRMIT ............. 

ANS 1) THE LIMIT OF 10 LACS IS NOT APPLICABLE IN CASE IF THE SERVICE TAX ON DIRECTO'S REMUNERATION. SINGLE RUPEE PAYMENT AS DIRECTOR'S REMUNERATION IS CHARGABLE TO SERVICE TAX FOR THE SERVICES PROVIDED BY THE DIRECTOR TO THE COMPANY

ANS 2) IT'S MANDATORY FOR THE COMPANIES WHO ARE PAYING THE REMUNERATION TO THE DIRECTOR TO TAKE THE SERVICE TAX NUMBER IRRESPECTIVE OF THE AMOUNT OF DIRECTOR'S REMUNERATION.......

ANS 3) INDIRECTLY IT MEANS TO SAY THAT THE COMPANY HAS TO TAKE THE SERVICE TAX NUMBER TO PAY THE SERVICE TAX ON THE DIRECTOR'S REMUNERATION ON THE REVERSE CHARGE METHOD BECAUSE ONE CAN NOT PAY SERVICE TAX WITHOUT SERVICE TAX NUMBER...

1 Like
Nirmit Choraria

Nirmit Choraria (CA Final)     12 August 2012

Remuneration paid to any type director is taxable as there is nothing mentioned in the notification So does notification 45/2011 of 7 august has to seen with Ny other section also ???
CA Ganesh Karthik

CA Ganesh Karthik (Chartered Accountant)     13 August 2012

Dear Nirmit,

 

The Notification should not be read in isolation. It has to be read along with basic provisions of the Act.

 

As per the Finance Act, the term service has been defined. As per the definition, Service excludes any service rendered by an employee to his employer in the course of his employment. Hence, every Whole Time Director / Managing Director / Executive Director, who is in the rolls of the company is not liable to service tax, as they are employees of the company.

 

Hence, this notification is applicable only to non-executive directors.

 

Hope your doubt is clarified.

CS Shraddha G. Kulkarni

CS Shraddha G. Kulkarni (Practising Company Secretary)     13 August 2012

Dear All,

Kindly inform who will be liable to pay Service Tax, Director or Company in following cases- 

for Remuneration paid to non executive director during 01.07.2012 to 06.08.2012 and

for remuneration paid to non executive director after 06.08.2012.

 

Also inform by what date it should be paid and if it is not paid by such date wheteher penaulty is to be paid @ 18%.

 

SIDDHARTH KOTHARI

SIDDHARTH KOTHARI (N.A)     13 August 2012

Originally posted by : CA Ganesh Karthik

Dear Nirmit,

 

The Notification should not be read in isolation. It has to be read along with basic provisions of the Act.

 

As per the Finance Act, the term service has been defined. As per the definition, Service excludes any service rendered by an employee to his employer in the course of his employment. Hence, every Whole Time Director / Managing Director / Executive Director, who is in the rolls of the company is not liable to service tax, as they are employees of the company.

 

Hence, this notification is applicable only to non-executive directors.

 

Hope your doubt is clarified.

Sir, word used in the notification is "DIRECTOR" and as per Section 2(13) of the Companies Act,1956 defines the DIRECTOR as follows ......DIRECTOR includes any person occupaying the position of director ,by whatever name called......The notification has not been read in isolation .It's in agreement with the Definition of the "DIRECTOR" as per Companies Act,1956. And the said Notification is going to be applicable to all directors whether executive or non-executive.......

Nirmit Choraria

Nirmit Choraria (CA Final)     13 August 2012

agree with siddharth kothari.

CA Ganesh Karthik

CA Ganesh Karthik (Chartered Accountant)     13 August 2012

Dear Siddharth,

If you see the definition of Service as per Section 65B(44) of the Finance Act, 1994,

"Service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—
a. .........

b. a provision of service by an employee to the employer in the course of or in relation to his  employment;

c. ..........

 

Ordinarily, all the Executive Directors are in the rolls of the company. Further, TDS is deducted under Section 192 of the Income Tax Act. In such cases, the service provided by the directors are excluded from the very definition of service itself as they are employees of the company.

 

So, if it doesnt fall under the definition of service itself, service tax is not applicable at all.

 

And, if service tax is not applicable at all, there is no question of applicability of this notification.

 

This notification purely applies to only those directors who are not in the nature of Employees of the Company.

SIDDHARTH KOTHARI

SIDDHARTH KOTHARI (N.A)     13 August 2012

Originally posted by : CA Ganesh Karthik

Dear Siddharth,

If you see the definition of Service as per Section 65B(44) of the Finance Act, 1994,

"Service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—
a. .........

b. a provision of service by an employee to the employer in the course of or in relation to his  employment;

c. ..........

 

Ordinarily, all the Executive Directors are in the rolls of the company. Further, TDS is deducted under Section 192 of the Income Tax Act. In such cases, the service provided by the directors are excluded from the very definition of service itself as they are employees of the company.

 

So, if it doesnt fall under the definition of service itself, service tax is not applicable at all.

 

And, if service tax is not applicable at all, there is no question of applicability of this notification.

 

This notification purely applies to only those directors who are not in the nature of Employees of the Company.

Dear Sir,

As per the Recent Amendment u/s 194J of the Income Tax Act, it's mentioned that Remuneration or sitting fees or commission or such other payments made to the Directors then TDS to be made under section 194J........So the Director's Remuneration is not going to be taxed under head of SALARY as TDS not to be made under Section 192........

Logic of the above notification is not based on the Executive or Non-Exceutive Director or it's also not based not whether the Director is on roll or not.........

Logic of the notification is based on the capacity of the director at the time of receipt of payment i.e to say it in his individual capacity or in his representative capacity(when he representing the company)...........

If the director gets the payament in his personal capacity/individual capacity then the SERVICE TAX IS NOT LEVIABLE...........but if the director gets the payment in his representative capacity then the SERVICE TAX IS LEVIABLE..........

CA Ganesh Karthik

CA Ganesh Karthik (Chartered Accountant)     14 August 2012

Dear Siddharth,

 

As per the amendment that you are mentioning, i.e., Section 194J (ba), TDS under this section shall be deducted to any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company.

 

So, to all such remuneration on which TDS is deducted under section 192, we can very well take a stand that there is an employer - employee relationship, and the same is thus not liable to service tax (by way of exclusion from the definition of service itself).

 

So, primarily, in the following cases, it can be regarded that there is employer - employee relationship:

  1. Director is in the rolls of the company;
  2. TDS is deducted under Section 192 of the Income Tax Act, 1961;
  3. The Director is subject to PF and such other employee benefits on the remuneration received by him.

The above conditions may be individual or cumulative, but provide us enough evidence that there is clearly an employer - employee relationship. Further, there may be other factors to establish the same. I have only given such cases which I could remember.

 

Others may please offer their comments if they disagree.

Ajay Aggarwal

Ajay Aggarwal (Proprietor)     14 August 2012

Pls advice the status of sitting fee paid to directors? will it attract service tax?

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