APRIL 14, 2020

By K Srinivasan

COMPANIES will have to pay GST on the remuneration they dole out to its directors, the Authority for Advance Ruling (AAR) has said.

In an application filed before the Rajasthan bench of the AAR, Clay Craft India Pvt. Ltd - 2020-TIOL-64-AAR-GST had sought clarification on whether salaries paid to directors would attract Goods and Services Tax.

The company said its directors are working as employees for which they are being compensated by way of a regular salary and other allowances.

It said that the Central Tax (Rate) notification clearly states that services supplied by a Director of a company will be considered as supply and hence directors cannot be called an employee.

So it is very clear that the services rendered by the Director to the company for which consideration is paid to them in any head is liable to pay GST under RCM (Reverse Charge Mechanism)," the AAR order concluded.

Under GST laws, some of the common functions carried out at an organization's head office like human resource, IT functions, audit and legal operations incur cost as they are identified as a service.

Recently, the Government has started questioning top companies and banks on their practice of passing on some of the common costs like salaries of chief executives to their branch offices.

This means that if companies were to treat services as supply, then the people, like Directors or CEOs, providing the service will pay GST. Let's have a look at the critical analysis of the situation.

Section 9(3) and Section 9(4) of the CGST Act, 2017 contains the provisions with respect to Reverse Charge Mechanism in respect of certain services which are notified from time to time.

Notification 13/2017-CTR dated 28-06-2017 vide entry No. 6 provides for levy of RCM on services provided by a director of the company or a body corporate to the said company or body corporate.

Further, Schedule III of CGST Act, 2017 provides for certain transactions which are neither considered as supply of goods or supply of service. Reading both these provisions together raises the below questions:

1. Whether Salary or Remuneration paid to Directors is liable for payment of GST under Reverse Charge Mechanism?

2.  In case the same is excluded under Schedule III, what is the relevance of Entry 6 in Notification No 13/2017-CTR

This question is more relevant considering the decision of the Authority of Advance Ruling in Karnataka where in the case of M/s Alcon Consulting Engineers (India) Pvt. Ltd. - 2019-TIOL-378-AAR-GST, it held that the remuneration paid to the directors is subject to GST under reverse charge and is covered under entry 6 of the notification 13/2017-Central Tax dated 28-06-2017.

Though the ruling does not provide one with a detailed reasoning as most rulings these days do, for the applicability of GST on the same, one may need to turn to various scenarios/laws/acts in order to apply such a proposition for taxability under Reverse Charge Mechanism.

Roles and Responsibilities of different types of Directors:

There are different kinds of directors that a company can appoint. Broadly they can be divided into two categories;  

1. Executive directors  

2. Non- executive directors .

Executive directors are the ones who are basically involved in the day to day execution of the affairs of the Company and include whole time directors, managing directors, etc.

Non-executive directors, include independent director, nominee director etc. The executive directors of a company receive remuneration and are in full time employment of the company, while the other types receive what's called, a sitting fees.

The non-executive directors are generally the ones who are professionally involved merely in broad business of the Company and do not involve with the day to day activities.

As per Section 2(94) of the Companies Act, 2013 read with the explanation contained in Section 269 of Companies Act, 1956 "whole time director" is defined as follows:

"whole-time director" includes a director in the whole-time employment of the company'

From the above definition and the explanation, they are fairly evident that the words used are 'whole-time employment of the company'   and the said words used amply clarify the intention of law makers that the whole-time directors are the persons who devote their whole time in management of the company.

What does the Income Tax Act, 1961 say?

Under the Income Tax Act, 1961 the remuneration paid to directors is subjected to TDS u/s 192 of the Income Tax Act, 1961. Section 192 provides for deduction of TDS in case of payments which are Salary.

The said remuneration received is in lieu of managing the affairs of the company in the capacity of employee and taxed as salary in hands of directors.

Also, the remuneration paid to the directors is assessed under the head "Income from Salary" by Department of Income Tax.

Non-Executive Directors are not entitled to remuneration but are subject to payment of Sitting Fees. As far as Director Sitting Fees paid is concerned, the same is liable for deduction under section 194J and considered as professional fees and not Salary.

What does the Companies Act, 2013 say?

Under the Companies Act, a General Circular No. 24/2012 dated 09.08.2012 issued by Ministry of Corporate Affairs (MCA) clarifies as follows;

"The Non-Whole Time Directors of the company are presently not covered under the exempted list and as such, the sitting fees/commission payable to them is liable to Service Tax. Service tax is payable on the commission/sitting fees payable to Non-Whole Time Directors of the company."

It is evident from the above circular issued by MCA that even under the service tax regime, service tax was payable only on any Commission or sitting fees paid to Non-Whole Time Directors.

The exclusion of Whole-time Directors and Managing Directors in the above circular clarifies the intention of legislature that the said directors are employees of the company and activities carried out by them cannot be termed as service and made liable to service tax.

Extending the same logic to the provisions of GST law, similarly the same should not be made liable for payment of GST, except of course for the no-executive/other independent director's Commission or Sitting fees.

Remuneration paid to them by company is for the services provided by the directors to the company, is okay for them to say which in the partial light of entry 6 of the Notification 13/2017 - CT dated 28-06-2017, may look seemingly vindicated at least.

But the AAR's conclusion vide Point No. 5 of the ruling, that directors are not employees of the company is outright preposterous and not in the fitness of things, appear to be their appointed business in the subject proceedings respectfully in the opinion of the Author as shared by the whole host of stake holders who have some knowledge of this Law ever since 2012.

However, in the opinion of the Author, it would be highly incorrect as mistakenly held by some professionals that it needs to be vivisected and seen on a case to case basis whether the amount so paid to a director is the course of his employment with the company as a Director or in his independent professional capacity!

It is absolutely and professional misconduct of a Director to act as Dr.Jekyll and Mr.Hyde - by splitting his personality into the above two types at the same time, so as to derive remuneration from two sources for one role, which he is duty-bound under a single employment contract to do and as also expected of him under the Companies Act..

If it were to be viewed in that angle as the AAR perhaps hints, it will be too obtuse to magnify his role like that and see it as one played for a salary and the other for a fee while in employment which will be construed as professional misfeasance of his authority as Director under the Companies Act (Sec 543 refers).

Therefore, one may be able to conclude safely as below -

++ As per sec 7(2) of GST Act, supply excludes, among other things in the Schedule III, services supplied by an employee to the employer in the course of or in relation to his employment.

++ By a conjoint reading of Sec 7(2) and Notification No 13/2017 - CT, any amount paid to a Director which is in the nature of employment contract is not liable for payment of GST.

++ However, any amount paid to Directors in the nature of professional contract will be liable to tax in the hands of the Company on Reverse Charge basis.

(The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)