This article
analyses the GST implications of different payments made by companies to their
Directors. Such payments can be broadly categorised into:
(1) Remuneration to Whole-Time Directors
(2) Remuneration to Independent Directors
(3) Payment towards expenses as lump sum or as
reimbursement.
Each of the above
is discussed below.
REMUNERATION TO WHOLE-TIME DIRECTORS
Whole-Time
Directors (who can be professionals or from the promoter group) (‘WTD’) are
those persons who are responsible for the day-to-day operations of the company
and are entitled to a remuneration. The terms of appointment for such WTDs
(including the remuneration and perquisites) are as per the limits laid down by
Schedule V to the Companies Act, 2013. The remuneration can be a fixed minimum
amount per month or a combination of fixed amount plus a commission based on a
percentage of the profits. The said terms are laid down in an agreement
approved by the Board of Directors.
In terms of the agreement between the company and the WTD/s, the WTD is
regarded as having a persona of not only a Director but also an employee
depending upon the nature of his work and the terms of his employment.
Moreover, in all such cases the company makes necessary deductions on account
of provident fund, profession tax and deduction of tax at source under
Income-tax law, treats these Directors as employees of the company in filings
before all statutory authorities and considers the remuneration paid to them as
a salary. Thus, the relationship of the Director vis-à-vis the company would be
that of an employer-employee.
If the same is
analysed from the GST point of view, Schedule III of the Central Goods and
Services Tax Act, 2017 (‘CGST Act’) provides for supplies which are to be
treated neither as a supply of goods nor a supply of services. Entry (1) of the
said Schedule reads as follows, ‘Services by an employee to the employer in
the course of or in relation to his employment’. From this it can be
inferred that the services supplied by an employee to the employer is not a
service liable to GST.
REMUNERATION TO INDEPENDENT DIRECTORS
Independent Directors (‘IDs’), on the other
hand, are not WTDs but are recommended by the Board of Directors and appointed
by the shareholders. They are normally separate and independent of the company
management. These IDs provide overall guidance and do not work under the
control and supervision of the company management and therefore, by inference,
they are not employees of the company. IDs attend the meetings of the Board or
its committees for which they are paid fees, usually referred to as sitting
fees / directors’ fees. In many cases, the Directors are also paid a percentage
of profits as commission.
Analysing these
payments to IDs from the GST perspective, Entry 6 of Notification No.
13/2017-CT (Rates) and No. 10/2017-IT (Rates) both dated 28th June,
2017, effective from 1st July, 2017 issued under the CGST Act (‘Reverse
Charge Notification’) provides that the ‘GST on services supplied by
a director of a company or a body corporate to the said company or the body
corporate located in taxable territory shall be paid under reverse charge
mechanism by the recipient of services’.
Thus, in case of
payments to IDs (whether they are located in India or domiciled outside India),
the company will have to pay GST under Reverse Charge Mechanism (‘RCM’),
albeit appropriate credit of such GST paid shall be available to the
company, subject to fulfilment of other terms and conditions of availment of
ITC.
PAYMENT TOWARDS EXPENSES AS LUMP SUM OR AS REIMBURSEMENT
In many companies,
Directors (whether WTDs or IDs) are also paid a lump sum amount towards
expenses, or reimbursed the actual expenses incurred by them in performing
their duties as directors, e.g. travel expenses, accommodation expenses, etc.
The same is as per the terms of appointment for WTDs or the Directors’ Expense
Reimbursement Policy of the company.
Regarding the
applicability of GST on such payments, the Authority on Advance Rulings (‘AAR’)
in the case of M/s Alcon Consulting Engineers (India) Private Limited,
Bengaluru (AR No. Kar ADRG 83/2019) dated 25th September, 2019,
while responding to the query, whether expenses incurred by employees and later
reimbursed by the company are liable to GST, ruled in the negative and observed
that the expenses incurred by the employees are expenses of the applicant and
therefore this amount reimbursed by the applicant to the employee later on
would not amount to consideration for the supplies received, as the services of
the employee to his employer in the course of his employment is not a supply of
goods or supply of services and hence the same is not liable to tax.
Therefore, any
expense reimbursement to a WTD who is treated as an employee would not be
liable to GST. However, if the reimbursement of expenses is made to an ID, who
also receives sitting fees, the same shall be treated as part of the
consideration and would be liable to GST under the RCM.
Analysis of
the AAR decision in Clay Craft India Private Limited
Whilst the above provisions of the GST law regarding the taxability of
payments made to the Directors were fairly settled, a recent Advance Ruling
issued by the AAR, Rajasthan in the case of Clay Craft India Private
Limited (AR No. Raj/AAR/2019-20/33) dated 20th February, 2020 held
that consideration paid to Directors by the company will attract GST on Reverse
Charge basis as it is covered under Entry 6 of the Reverse Charge Notification
issued under the CGST Act. Entry 6 of the said Notification provides that the
GST on services supplied by a Director of a company or a body corporate to the
said company or the body corporate located in the taxable territory shall be
paid under RCM by the recipient of services.
SERVICE SUPPLIED BY AN
EMPLOYEE
The applicant in
the above Advance Ruling had sought clarity on ‘whether payment made for
services availed from a Director, in their capacity as an employee, is also
liable to be taxed under GST on RCM basis’. The clarification was sought
keeping in mind Entry (1) of Schedule III of the CGST Act on the basis of which
the ‘Services by an employee to the employer in the course of or in
relation to his employment’ is treated neither as a supply of goods nor
a supply of services. Thus, the service supplied by an employee to the employer
is not a supply for GST purposes.
The aforesaid query
was raised by the applicant pursuant to a decision passed by the AAR, Karnataka
in the case of M/s Alcon Consulting Engineers (Supra) wherein the
Authority provided that the services provided by the Director to the company
are not covered under Schedule III Entry (1) of the CGST Act as the Director is
not an employee of the company and hence the payment made to him is liable to
GST.
In both the
aforesaid rulings, there is no segregation of payments / consideration paid to
the Directors for the services provided by such Directors in their capacity as
an employee or as an agent or as a Director.
EPF DEDUCTED FROM
DIRECTORS
It would be pertinent to note that the applicant in the Clay Craft
case (Supra) was already paying GST under RCM on any commission paid to
its Directors, who were providing services to the company in the capacity of
Director. However, payments for the services received from its Whole-Time
Directors / Managing Directors, who were supplying services in their capacity
as employees of the company, were made in the form of salary and the same were
also offered by the Directors in their personal income tax returns under
‘Income from Salary’. The company was also deducting EPF from their salaries
and all other benefits given to them were as per the policy decided by the
company for its employees.
However, the AAR
did not consider the above and only took note of the RCM entry under GST and
denied treating Directors as employees of the company.
Analysis of
the AAR decision in Anil Kumar Agrawal
In yet another
recent Advance Ruling by the AAR, Karnataka in the case of M/s Anil Kumar
Agrawal (AR No. Kar ADRG 30/2020) dated 4th May, 2020, the
Authority analysed incomes derived from various sources so as to examine
whether such income in relation to any transaction amounts to supply or not.
One such source of income examined was ‘Salary received as Director from
a Private Limited Company’.
The AAR, Karnataka
at paragraph 7.8 of the ruling explicitly observed that:
‘The applicant
is in receipt of certain amount termed as salary as Director of a private
limited company. Two possibilities may arise with regard to the instant issue
of amount received by the applicant. The first possibility that the applicant
is the employee of the said company (Executive Director), in which case the
services of the applicant as an employee to the employer are neither treated as
supply of goods nor as supply of services, in terms of Schedule III of CGST Act
2017.
The second
possibility that the applicant is the nominated Director (non-Executive
Director) of the company and provides the services to the said company. In this
case the remuneration paid by the company is exigible to GST in the hands of
the company under reverse charge mechanism under section 9(3) of the CGST Act
2017, in the hands of the company, under Entry No. 6 of Notification No.
13/2017-Central Tax (Rate) dated 28th June, 2017.
…….
…….
In view of the
above, the remuneration received by the applicant as Executive Director is not
includable in the aggregate turnover, as it is the value of the services
supplied by the applicant being an employee.’
OBSERVATIONS
Keeping in view
these contradictory rulings, it would be pertinent to have a look at some of
the observations made in the following judgments / circulars / notifications of
various authorities. Though the judgments are in respect of the erstwhile
Service Tax law, the provisions being identical can also be applied to GST.
(i) Remuneration paid to the Managing Director
is to be considered as salary. A Managing Director may be regarded as having a
persona of not only a Director but also an employee or agent, depending upon
the nature of his work and the terms of the employment1.
(ii) If an amount paid to an individual was
treated as salary by the Income-tax Department, it could not be held by the
Service Tax Department as amount paid for consultancy charges and to demand
service tax on the same2.
(iii) If a Director is performing duties and is
working for the company, he will come within the purview of an employee3.
(iv) Remuneration paid to four Whole-Time Directors
for managing the day-to-day affairs of the company and where the company made
necessary deductions on account of provident fund, professional tax and TDS as
applicable and declared these Directors to all statutory authorities as
employees of the company, remuneration paid to Directors was nothing but salary
and the company was not required to discharge service tax on remuneration paid
to Directors4.
(v) The Managing Director of a company may be
executive or non-executive. A Managing Director of a company may or may not be
an ‘employee’ of the company. It was rightly held that for the purpose of ESIC
the company is the owner. The Managing Director is not the ‘owner’. Even if the
Managing Director is declared as ‘Principal Employer’ to ESIC, he can still be
an employee5.
(vi) Payments made by a company to the Managing
Director / Directors (Whole-Time or Independent) even if termed as commission,
is not ‘commission’ that is within the scope of business auxiliary service and,
hence, service tax would not be leviable on such amount6.
(vii) The Managing Director / Directors (Whole-Time or
Independent) being part of the Board of Directors, perform management functions
and they do not perform consultancy or advisory functions…In view of the above,
it is clarified that the remunerations paid to the Managing Director /
Directors of companies whether Whole-Time or Independent when being compensated
for their performance as Managing Director / Directors, would not be liable to
service tax7.
(viii) The service tax (now GST) paid by the company
will be treated as part of remuneration to non-Whole-Time Directors and if it
exceeds the ceiling of 1% / 3%, the approval of the Central Government would be
required – Circular No. 24/2012 dated 9th August, 2012 of the
Ministry of Corporate Affairs. This entire circular is on the basis that GST is
payable on payments made to non-Whole-Time Directors only. And, as a corollary,
it can be inferred that service tax (now GST) shall not be payable on payments
made to Whole-Time Directors.
1 In Ram Prasad vs. CIT (1972) 2 SCC 696 dated
24th
August,
1972 bound to
cause uncertainty and unnecessary litigation.
2 In Rentworks India P Ltd. vs. CCE (2016) 43
STR 634 (Mum. – Trib.)
3 In Monitron Securities vs. Mukundlal
Khushalchand 2001 LLR 339 (Guj. HC)
4 In Allied Blenders and Distillers P Ltd. vs.
CCE & ST [2019] 101 taxmann.com 462 (Mum. –CESTAT)
5 In ESIC vs. Apex Engineering Ltd. 1997 LLR 1097
6 CBE&C Circular No. 115/09/2009-ST dated 31st July, 2009
7 CBE&C Circular No. 115/09/2009-ST dated 31st July, 2009
MAY LEAD TO NEEDLESS
LITIGATION
From the above it
can be further deduced that a Director may provide services to a company in the
capacity of a Director or agent or employee and may receive consideration /
payments in the form of sitting fees or commission or salary, depending on the
arrangement he / she has with the company. Consequently, tax would be payable
in accordance with the nature of the consideration derived by a company’s
Director providing services in his / her capacity as a Director or agent or
employee. Under such circumstances, considering all payments to Directors under
one category and imposing GST on the same is against the established principles
of law and bound to cause uncertainty and unnecessary litigation.
The AAR seems to have erred in delivering the rulings under the Clay
Craft and the M/s Alcon Consulting Engineers cases (Supra)
and by obvious inadvertence or oversight failed to reconcile the aforesaid
issue with that of some previously pronounced judgments of co-equal or higher
authorities. It also appears that the AAR wanted to differ from the precedents;
however, it was not open to the AAR to completely ignore the previous decisions
on illogical and unintelligible grounds. Regrettably, the ruling delivered by
the AAR without referring to the aforesaid precedents and without consciously
apprising itself of the context of such judgments on similar issues, is per
incuriam, meaning a judgment given through inadvertence or want of
care, and therefore requires reconsideration. Per incuriam judgments are
not binding judgments. Needless to say, the AAR is only binding on the
applicant but carries some reference and, therefore, nuisance value and should
be appealed before the higher forum.
CONCLUSION
While the AARs are not binding on anyone other than the applicants, the
companies may revisit their payments to Directors on which GST is not being
currently paid by them under RCM. Such payments should be analysed on the basis
of the contract / agreement with the Directors and the payment / non-payment of
GST under RCM against such payments to Directors be decided and documented.
There is also an
immediate need for a Central Appellate Authority for Advance Rulings since
contradictory rulings given by different state authorities, and sometimes even
by the same state authority as in the case discussed above (by the AAR,
Karnataka) can result in unnecessary confusion and avoidable litigation.
