In my article ‘GST
on payments made to Directors’ published on Page 24 of the BCAJ
issue of June, 2020, I had discussed in detail the various types of payments
made to Directors (whether Whole-Time Directors or Independent Directors) and
the GST implications of the same. That was on the basis of some judicial
precedents and a few contradictory Advance Rulings.
The inconsistent
Advance Rulings and the representations made by the trade and industry seeking
finality in the matter may have prompted the GST Policy Wing of the Central
Board of Indirect Taxes and Customs (the Board) to issue a clarification and to
avoid unnecessary confusion and costly litigation. The clarification was issued
vide Circular No. 140/10/2020-GST dated 10th June, 2020.
The clarification
has categorised the payments made to Directors under two scenarios – the applicability
of GST on remuneration paid by companies to:
(a) Independent Directors or those Directors who
are not employees of the company; and
(b) Whole-Time Directors, including Managing
Director, who are employees of the company.
The clarification
has laid emphasis on the relation of the Director with the company to decide
the leviability of GST and relied on the definition of Independent Directors
and Whole-Time Directors from the Companies Act, 2013. The same is summarised
hereunder.
Independent
Directors or those Directors who are not employees of the company
As per section
149(6) of the Companies Act, 2013, read with Rule 12 of the Companies (Share
Capital and Debentures) Rules, 2014, ‘independent directors’ are such Directors
who have not been an employee or proprietor or a partner of the said
company in any of the three financial years immediately preceding the financial
year in which he is proposed to be appointed in the said company.
And a ‘whole
time-director’ is defined u/s 2(94) of the Companies Act, 2013 in an inclusive
manner, to include a person who may not be an employee of the company.
In both the cases
mentioned above, where the Directors are not employees of the company, the
amounts paid to them for the services provided to the company would be outside
the scope of Schedule III of the CGST Act and would thus become taxable under
GST. As mentioned in the article earlier, such services would get covered under
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’) and, consequently,
GST shall become payable under Reverse Charge Mechanism by the company being
recipient of the services.
Whole-Time Directors, including Managing Director, who are employees
of the company
The clarification
provides that if a Director has been considered to be an employee of the
company, it would be pertinent to examine whether the activities performed by
the Director are in the course of an employer-employee relation. The
clarification emphasises that the services provided should be ascertained to be
under a ‘contract of service’ or ‘contract for service’ since the remuneration
under the latter would become taxable under GST.
To classify the
service being provided under the above categories, the Board has taken
cognisance of the treatment given to the remuneration under the Income-tax Act,
1961 (‘IT Act’) wherein the salaries are subjected to Tax Deducted at Source
(‘TDS’) u/s 192 of the Act and fees other than salaries, is liable for TDS u/s
194J.
Accordingly,
remuneration which is subjected to TDS u/s 192 shall be treated as
consideration for ‘services by an employee to the employer in the course of or
in relation to his employment’ and would get covered under Schedule III of the
CGST Act, 2017.
It has also been
clarified that if an amount paid to the Director is declared as Fees for
Professional or Technical Services and subjected to TDS u/s 194J, it shall be
treated as consideration for providing services and become taxable under GST.
In such cases, the liability shall be of the recipient of services, i.e., the
company, under the Reverse Charge Notification.
Provided
below is a comparative table for a quick reference on the applicability of GST
/ RCM on payments to Directors:
|
Payments
to Directors
|
Employer–Employee
Relationship
|
TDS
u/s
|
Applicability
of GST
|
Applicability
of RCM
|
Remark
|
|
Salary
|
Yes
|
192
|
No
|
No
|
Entry I of Schedule III of
CGST Act, 2017
|
|
Commission, Professional Fees,
Sitting Fees
|
Yes
|
192(2B)
|
No
|
No
|
|
Commission
|
No
|
194-H
|
Yes
|
Yes
|
Entry 6 of Reverse Charge
Notification
|
|
Contract Payment
|
No
|
194-C
|
Yes
|
Yes
|
|
Professional Fees, Sitting
Fees
|
No
|
194-J
|
Yes
|
Yes
|
|
Rent
|
No
|
194-IB
|
Yes
|
Yes
|
