Service Tax liability of Salary of Managing Director
Service Tax on Director's services
In CBEC’s Circular No. 115/09/2009-ST dated 31.7.2009 it was inter alia clarified that the amount paid by a company to their Managing Director / Directors (Whole-time or Independent) even if termed as commission, is not the ‘commission’ within the scope of ‘Business Auxiliary Service’; that such Directors, being part of Board of Directors, perform management function and they do not perform consultancy or advisory function; that therefore the amount paid to such Directors is not chargeable to service tax under ‘Management Consultancy Service’. It was further clarified that if such directors provide any advice or consultancy to the company, for which they are being compensated separately, such service would become chargeable to service tax.
In the General Circular No. 24/2012 dated 9.8.2012 of Ministry of Corporate Affairs, Government of India, it has been inter alia mentioned that Sitting Fee / Commission payable to Non-Whole Time Directors is liable to Service Tax.
Under the provisions of Income Tax Act, 1961, TDS on ‘Salaries’ is being deducted under Section 192. Whereas, TDS on any remuneration or fees or commission by whatever name called (other than those on which tax is deductible under Section 192) paid to a director of a company, is to be deducted under Section 194J by considering such payment as Fees for professional or technical services attracting Section 194J(1)(ba). Therefore, for the cases where Income Tax on the remuneration / fee / commission paid to any director (whole-time or part-time/non-executive) has been deducted under Section 194J, Service Tax would be payable by the Company under reverse charge mechanism.
In view of the above, the activities undertaken by Managing Director and Whole Time Directors of Company, in course of or in relation to their employment, shall not attract service tax, as such activities fall outside the ambit of the term “service”, as defined at Section 65B(44).
To determine whether a Director is an ‘employee’ of a Company or not, documents like Terms of Agreement (responsibilities and remuneration payable), Resolution passed by Company to employ the Director and Article of Association of the Company etc. needs to be examined.
These are personal views.
Shvetal Parikh
24/08/2015
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