OCTOBER 14, 2024

By CA Prateek Mitruka

Introduction

THE applicability of Goods and Services Tax (GST) on director's remuneration has been a point of discussion since the introduction of GST in India. The core issue revolves around whether the remuneration paid to a director is considered as a service liable to GST, or if it falls under negative list as part of an employer-employee relationship. In cases where GST is applicable, the company receiving the service may be required to pay GST under the Reverse Charge Mechanism (RCM).

Applicability of GST on Director's Remuneration

The applicability of GST to a director's remuneration is determined by the nature of the relationship between the director and the company. Section 7 of the CGST Act, 2017 defines "supply" to include all forms of supply of goods or services made for consideration. However, services provided by an employee to an employer in the course of or in relation to employment are excluded from the scope of GST under Schedule III of the CGST Act, 2017.

Key Considerations:

1. Directors as Employees:

When a director is treated as an employee of the company, and their remuneration is categorized as salary subject to TDS under Section 192 of the Income Tax Act, such remuneration is not considered a "supply" under GST. Therefore, no GST is applicable on these payments. This includes whole-time directors or managing directors who are on the company's payroll and have an employment contract.

Relevant Extract from Schedule III of the CGST Act, 2017:

"Services by an employee to the employer in the course of or in relation to his employment shall not be treated as a supply of goods or services or both."

In this case, remuneration paid to directors is outside the purview of GST as it is considered an employment relationship.

2. Directors as Independent Service Providers:

For directors who are not classified as employees, GST is applicable. These directors, often non-executive or independent directors, provide their services to the company in a professional capacity, and their fees are subject to TDS under Section 194J of the Income Tax Act (which deals with professional services). In such cases, the remuneration is treated as consideration for the supply of services, making it liable to GST.

Judicial Precedent:

In the case of Clay Craft India Pvt. Ltd. (AAR Rajasthan), the Authority for Advance Rulings (AAR) held that remuneration paid to directors who are not employees attracts GST, as they are providing services as independent professionals rather than employees.

Reverse Charge Mechanism (RCM) and Director's Services

Once it is established that GST is applicable to a director's remuneration, the next question is whether the company must discharge GST under the Reverse Charge Mechanism (RCM). The Reverse Charge Mechanism (RCM) is defined under Section 9(3) of the CGST Act, 2017, which allows the government to specify categories of supply for which the recipient, instead of the supplier, is liable to pay GST.

Notification No. 13/2017-Central Tax (Rate), issued on June 28, 2017, specifies that services provided by a director to a company fall under RCM, meaning the company must pay GST on the remuneration or fees paid to non-employee directors.

RCM Applicability to Directors' Remuneration:

1. Employee-Employer Relationship:

In cases where the director is an employee of the company, and remuneration is paid as salary, GST is not applicable, and therefore, the RCM provisions do not come into effect. This category generally includes whole-time directors and managing directors who have employment contracts with the company and are subject to TDS under Section 192.

2. Independent Directors and Non-Executive Directors:

Generally, for independent or non-executive directors, the company receiving the services must pay GST under RCM. These directors typically do not have an employment relationship with the company, and their fees are subject to TDS under Section 194J (pertaining to professional services). The company must account for the GST on these payments under RCM.

Relevant Extract from Notification No. 13/2017-Central Tax (Rate):

"In case of services supplied by a director of a company to the said company, the recipient (company) is liable to pay tax under the Reverse Charge Mechanism."

3. Board Sitting Fees:

Board sitting fees, which are often paid to directors for attending meetings, are considered independent services and are liable for GST under RCM. These fees are subject to TDS under Section 194J, and the company must discharge GST under RCM.

Judicial Precedents on RCM:

1. Clay Craft India Pvt. Ltd. (AAR Rajasthan):

The AAR ruled that remuneration paid to directors who are not employees falls under RCM, and the company must discharge its GST liability. This ruling reiterated that services provided by independent directors are taxable, and GST must be paid by the company under RCM.

2. Alcon Consulting Engineers Pvt. Ltd. (AAR Karnataka):

In this case, the AAR ruled that remuneration paid to whole-time directors, where TDS is deducted under Section 192, does not attract GST under RCM. This is because the director was considered an employee, and the remuneration was classified as salary under Schedule III of the CGST Act.

Directors in Dual Capacities

In certain cases, directors may function in dual capacities - both as employees and as independent service providers. This duality raises questions about the correct treatment of remuneration. Judicial interpretations have acknowledged that directors may serve in two capacities:

- As Employees: When functioning under an employment contract, the services rendered fall under the exclusion provided in Schedule III, and GST is not applicable.

- As Independent Professionals: When providing services outside the employment contract, such as consultancy or advisory services, GST is applicable under RCM.

Businesses must carefully assess the director's role to distinguish between payments for employment and payments for professional services.

Conclusion

Determining the applicability of GST on director's remuneration requires a clear understanding of the director's relationship with the company. If the director functions as an employee, GST is not applicable. However, for independent or non-executive directors, or when directors provide services outside their employment contract, GST is applicable, and the company must pay GST under the Reverse Charge Mechanism.

Proper categorization of directors, clear contractual arrangements, and compliance with RCM provisions are essential for avoiding disputes and penalties. Companies should also ensure accurate documentation to claim Input Tax Credit (ITC) on RCM payments where applicable.

[The views expressed are strictly personal.]