Analysis of CBIC Circular clarifying Taxability of ‘Directors Remuneration’

 Analysis of CBIC Circular clarifying Taxability of ‘Directors Remuneration’ Applicability of GST under Reverse Charge Mechanism in respect of Directors’ Remuneration has been a contentious issue since the erstwhile regime of Service Tax and it is being subject to litigation under GST regime, especially after two judgments pronounced by the Advance Ruling Authorities in the recent past and upheld the applicability of GST on Directors’ Remuneration. Advance Ruling Authority of Jaipur, Rajasthan in the case of M/s Clay Craft India Pvt Ltd. and Advance Ruling Authority of Karnataka in the case of M/s Alcon Consulting Engineers (India) Pvt Ltd held that GST is applicable on Director’s Remuneration under Reverse Charge Mechanism. CBIC issued a Circular No. 140/10/2020 – GST dated 10th June 2020 to clarify the intent of GST law as to whether the remuneration paid by companies to their directors falls under the ambit of entry in Schedule III of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act) i.e. “services by an employee to the employer in the course of or in relation to his employment” or whether the same are liable to be taxed in terms of reverse charge mechanism (RCM) notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017 (entry no.6). The issue of remuneration to directors has been examined under the following three different categories:

1. The leviability of GST on remuneration paid by companies to the Independent directors defined in terms of section 149(6) of the Companies Act, 2013 or those directors who are not the employees of the said company;
2. The leviability of GST on remuneration paid by companies to the whole-time directors including the managing director who is an employee of the said company; and
3. The leviability of GST on remuneration paid by companies to the employee directors which is declared separately other than salaries in the Company’s accounts and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services.

Category of Director / Director’s remuneration	Nature of contract	TDS	GST Applicability
Independent directors or those directors who are not the employees	Service      Contract	U/s 194J	Outside the scope of Schedule III of the CGST Act.   The recipient of the said services i.e. the Company is liable to discharge the applicable GST on reverse charge basis (RCM).
The director who is an employee in the company and remunerations are declared as Salaries in the books of a company	Employment Contract	U/S 192	Covered under the scope of Schedule III of the CGST Act and salaries paid to company directors will not attract GST
Director’s remuneration which is declared separately other than salaries in the Company’s accounts and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services	Employment Contract	U/s 194J	To be treated as consideration for providing the services which are outside the scope of Schedule III of the CGST Act.   Therefore, the recipient of the said services i.e. the Company is liable to discharge the applicable GST on reverse charge basis (RCM).

Source:  Circular No. 140/10/2020 dated 10.06.2020 issued by Central Board of Indirect Taxes and Customs Last Updated: 25^th June 2020 This article is contributed by:  CA Vaibhav Matta Assistant Director, Taxation

Tag: CBIC Circular