MAY 07, 2020

By K Srinivasan

WHAT could be the possible implications of interstate service coupled with reverse charge mechanism with reference to Director Services?

The power to levy tax on reverse charge arises from Section 9(3) of the CGST Act and Section 5(3) of the IGST Act which states that government may notify services on which reverse charge would be applicable.

Government had notified Director's services vide serial No.6 of CGST Notification No.13/97 dated 28/6/2017, that any services supplied by a director of a company to the said company would be covered under reverse charge.

Similar services were covered vide serial No.7 of IGST Notification No. 10/2017 dated 28/6/2017, in respect of inter-state supplies, which implies that the said director services are taxable interstate as well.

The word services has to be traced back to the definition under Section 2(102) of the CGST Act which includes any activity other than goods, money and securities for which separate consideration is charged.

However, the intent of such services needs to be looked at from the angle of such services when provided by a director? Whether in his official capacity/personal capacity, as director?

Therefore services like giving guarantee for loan taken by company, sitting fees, commission etc. all decidedly fall into services rendered in personal capacity.

In the light of above, would it look possible that a director's services could be both interstate and on reverse charge basis as well.

The entire concept of GST, being a destination based tax, is to tax the state where the goods/services are being consumed. The revenue should reach the hands of consumption state Government.  

The detailed provisions narrated in Section 12(2) of the IGST Act determines place of supply to imply the location of person where the services are received. Therefore, ideally, the tax should be destined to the state where the service of the director is being consumed.

What is the place where the services of a director are being consumed?

A director services on the board of the company. The board is the apex tool of corporate governance. Therefore, one must say the place where directors' services are being consumed is the place where the seat of corporate governance of the company is situated.

What is the place where the seat of corporate governance is situated?

CBDT vide its Circular of 24/1/2017 is said to have prescribed rules for its determination and mentions such place where key management and commercial discussions that are necessary for the conduct of the business of an entity as a whole, in substance, made as the POEM of the company and the place of registered office of the company is to be considered such a place.

However, there are many cases where registered office is not the place from where the company is effectively governed when companies have opted to register their offices in remote locations, say factories, tea gardens, original place of its formation, to be a relic in future.

There have been elaborate discussions worldwide in determining place of effective management (POEM) of the company. It is easier to write a real poem in the place of figuring out the one here, I am tempted to write, in lighter vein.

In any case, the place where most of the substantive board meetings are held or the place where the apex management is seated should be the seat of corporate governance.

What is the location of supplier in case of director services?

Section 2(71) of the CGST Act, dealing with location of supplier of services states:

2 (71) "location of the supplier of services" means,-

(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;

(b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provisions of the supply; and

(d) in absence of such places, the location of the usual place of residence of the supplier

However in case of director services, one may like to take a view that the location of supplier is the place where his usual place of residence is situated since such directors do not have any registered office.

Director's remuneration and the concept of Cross-charge

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 temptation to passing on some of these common costs like salaries of chief executives to their branch offices, loosely referred to as a cross charge by them.

Such tendencies on the part of companies to hasten to cross charge some of the expenses incurred towards director's remuneration can't be said to be uncommon.

It has, therefore, become all the more important to zero in on the right type of tax to be levied, dependent on the location/seat of these corporate expenses to discharge the correct type of tax liability.

Cross charge and the goose chase

However, companies do face enormous difficulties going by the place of residence of the directors to fix the POS. IGST needs to be paid in the origin state while the tax may ultimately land up in the hands of destination state of consumption.

This would mean that if the domicile of different directors is in different states, the company has to actually do a wild goose chase of those states to pay tax or take up registration as a casual taxpayer every time such services mandate payment. This seems both impractical and absurd.

Since the ultimate benefit of the tax anyway has to come to the state where the seat of corporate governance is situated, it may be ideal for companies to pay tax under CGST/SGST in such state considering that the company is the recipient and also the de jure supplier.

Are all incomes of directors not directly taxable but some are to be indirectly taxed, as well?

There is further a leading argument that only services which is adumbrated as part of an employment contract of a director will qualify as salary arising out of an Employer-Employee relationship.

This, of course, attracts TDS to be deducted from the salaries of the directors and paid by the Company as per the IT Act.

While rest of the service incomes such as for extending personal guarantee for loans, sitting fees and commission paid to the directors, would be treated as payments towards services rendered in the personal/professional capacity of directors, fit to be taxed in their hands on FCM basis.

Are there added tasks for the companies to segregate the incomes of directors as Direct vs. Indirect and FCM vs. RCM?

Added to this, is the next task to classify, which of the services of a director will qualify for tax by the company on RCM and which of the services by the same director himself on FCM, besides TDS to be complied for the salaried class of whole-time directorships.

As long as these directors belong to two water tight compartments as Executive Directors and Non-Executive Directors, its fine. You can funnel their expenses into each of those Silos and do the tax compliance respectively on TDS and RCM basis.

What if the taxable limit of services of the Director is within the threshold limit of 20 Lakhs per annum?

It would be in the interest of the company to ascertain and ensure that the Director does enjoy free exemption limit of 20 Lakhs.

There's also the imminent tax compliance/ liability on the company, on RCM basis, by making self-invoicing on behalf of the exempted directors, once Section 9(4) notification, if and when it comes in to effect from a future date.

Does subject matter of taxation of director's remuneration resemble a game of trick or treat?

But the role of a Director is a tricky two-in one role. He has skill sets that attract both types of remuneration namely salary for whole-time contract of work and other incomes for certain other freelance roles played outside of employment contract.

Here starts the trouble. The company may be in State X and the usual place of residence of the directors may be in other states like Y and Z, including state X.

Now, the company in state X has to pay IGST or CGST/SGST on some part of the remuneration which is non-executive in nature based on the location of the Directors.

Similarly, it has to let the directors register themselves under GST and charge the company intra/inter-state tax as the case may be based on POS, and make the payments to them including the tax of IGST or CGST/SGST, as the case may be.

A piece of suggestion or two from the Author

No matter where they meet, the meeting still discusses matters pertaining to the company, and, therefore, the usual seat of corporate governance should still be taken as the destination state and decide GST as intrastate.

In all such transactions, it is further advisable to raise a self-invoice in the name of Director c/o the company themselves from the place where their seat of corporate governance is and charge CGST & SGST on the invoice, instead of embarking on a journey to ascertain the POS, based on the usual residence of the Directors to rule out interstate tax complications, under GST.

In other clear cut cases of services of specialized nature rendered by the Directors to the Company, it's the look out of the company and directors together, to see to the registration and payment of GST by the directors to the Government directly, in step with the ground rules of the Act, discussed above.

Also read - Dissecting the Clay Craft(ing) judgment

(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.)