Note on GST applicability on “Directors Remuneration”

Note on GST applicability on “Directors Remuneration”  Is Remuneration paid to Director subject to GST has been a controversial issue since the erstwhile regime of Service Tax and it is being subject to consistent litigation even under the GST regime? To determine the GST applicability on the director’s remuneration, the main question is whether the transaction of supply of services by the director to a company constitutes a Supply as per the provisions of GST law or not? Entry No. 1 of Schedule III (transactions which are treated as neither supply of goods nor services as per Section 7(2)(a) of CGST Act, 2017) provides that: “Services by an employee to the employer in the course of or in relation to his employment” Therefore, it is to one’s interpretation of whether the director’s remuneration falls under this category or not? If yes, then, in that case, No GST would be payable as it will be out of the purview of the scope of ‘supply’ itself. However, in case if it is construed that Entry No. 1 of Schedule III is not applicable to the Director’s remuneration, then in that scenario GST under RCM would apply as then in that scenario it would fall under Sr. No 6 of the Notification 13/2017-Central Tax (Rate), dated 28-6-2017 on the list of services covered under RCM in which the relevant clause of director remuneration provides as under: 6. Services supplied by a director of a company or a body corporate to the said company or the body corporate. Therefore, the main question to be answered is whether the services provided by a Director are covered under Schedule III of the CGST Act, 2017, or not as then it would be covered under the above mentioned and would be subject to GST under RCM. Due to the above legal interpretation involved, many taxpayers have approached their jurisdictional Authority for Advance Authorities to seek more clarity on this subject. Recently, there have been few contradicting Authority for Advance Ruling judgments passed on this issue. A similar question was raised before the Hon’ble Rajasthan AAR in the case of M/s Clay Craft India Pvt. Ltd. whether GST is payable under RCM on the director’s salary being paid as per the terms of the employment contract. The contention of the applicant was that since there is an employer-employee relationship that exists between the company & director and the TDS & Provident Fund is also being deducted and deposited by the company, therefore it should be covered under Schedule III of the CGST Act, 2017. However, the Hon’ble AAR ruled that GST is applicable to the consideration being paid to the director in the form of remuneration for its services is specifically covered under the Notification No.13/2017- Central Tax (Rate). Thus, GST under RCM shall apply. It seems that the Hon’ble AAR has decided on the basis of a literal interpretation of the above-mentioned Notification 13/2017-Central Tax (Rate) and put the pertinent question asked to rest and held the director’s remuneration as taxable, without appreciating the fact that a Director in a Company was also an employee of the Company Similarly, recently the Karnataka AAR has given a contradictory judgment in the case of M/s Anil Kumar Agrawal. In this case, the assessee applied before the AAR to enquire whether the director’s salary shall be considered for Aggregate Turnover for registration under GST or not. In this regard, AAR stated that there could be two possibilities i.e. first, the applicant could be an employee of the said company as an executive director, or he could be a non-executive director of the company and provide his services to the company. In the first case, the service of the applicant as an employee to the employer is neither treated as supply of goods nor supply of services as the same would fall under Schedule III of the CGST Act. However, in the second case remuneration paid to non-executive directors would be liable to RCM under GST by virtue of Notification no. 13/2017 Central Tax (Rate), Dt. 28.06.2017. This order of Karnataka AAR seems to be a more balanced view as compared to the view taken by Rajasthan AAR. This order has provided more clarity on the treatment of the director’s remuneration, however contrary rulings by state-level AARs generally lead to increased confusion for taxpayers. It is important to highlight that RCM on Director’s Remuneration is not a new concept in GST. The concept has been borrowed from erstwhile Service Tax Laws. In-Service Tax Regime clause ((iv)(b)) of Notification No. 30/2012-ST dated 20.06.2012 has included the services “provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate” under RCM. Further, the definition of Service as per provisions of the Finance Act, 1994, excludes service by an employee to the employer in the course of or in relation to his employment. Also, CBIC vides para 7 of Letter No. F. No 354/127/2012-TRU dated 27-07-2012 has clarified that the Services of a director are taxable when payment is received in his personal capacity. Thus, the basis above, the industry has unanimously adopted a tax position that only services provided by the director in his personal capacity are taxable, and director remuneration paid by the company should not be liable to tax under RCM. Therefore, no company was paying Service Tax on the director’s remuneration under the service tax regime. Our Comments We are of the view that the director remuneration would be subject to litigation in days to come till the time Central Board of Indirect Taxes and Customs (CBC’) or the GST Council provides due clarification in this regard. It is pertinent to note here that Authority for Advance Rulings, is a quasi-judicial body that helps taxpayers find out potential tax liabilities in advance and the order passed by AAR are binding on the concerned applicants and its jurisdictional officers only. Therefore, it is recommended that all businesses should be well prepared to face this issue during Audits and Assessment and should revisit the current structure of directors and keep the robust documentation in a place like relevant employment contracts with directors, details of salary paid & tax deducted, board resolutions and other relevant documents in support of their employment. Services Offered By MBG We at MBG provide our clients with comprehensive GST advisory services to minimize the tax risks which may entail at a later stage. We also support our clients in maintaining robust documentation to enable consistency with GST laws. Last Updated: 22nd May 2020 This article is contributed by:  Deepak Arora Executive Director,  Indirect Taxes  

Tag: GST