1. Introduction:
In this article, we shall discuss about all the important aspects in regard to payment of GST under reverse charge mechanism (RCM) on director remuneration/services.
As per Section 2(98) of the CGST Act, 2017 ‘reverse charge’ means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of IGST Act, 2017.
In accordance to the powers conferred under section 9(3) of CGST Act, 2017 and section 5(3) of IGST Act, 2017, Notification No. 13/2017-Central Tax (Rate) dated 28-6-2017 and Notification No. 10/2017-Integrated Tax (Rate) dated 28-6-2017 (RCM Notifications) were issued by Govt, notifying the situations wherein tax on supply of services would be paid by recipient under reverse charge mechanism. As on date 22 services are under ambit of reverse charge mechanism which includes Director Services.
2. Relevant extract of Notification mandating GST under RCM for director services / remuneration:
The relevant extract of RCM Notification in regard to security services is given below for ready reference.
| Sl. No. | Category of Supply of Services | Supplier of service | Recipient of service |
| 6. | Services supplied by a director of a company or a body corporate to the said company or the body corporate | A director of a company or a body corporate | The company or a body corporate located in the taxable territory |
3. Situations where reverse charge mechanism (RCM) will apply on director services / remuneration:
The director services would be covered under the ambit of reverse charge mechanism, if and only if all the following three conditions are satisfied.
a). Services supplied should be by a Director:
As per RCM Notification, services supplied by a director of a company or a body corporate to such a company or body corporate would only be covered under the ambit of reverse charge mechanism.
It may be noted here that services provided should be in his capacity as Director in order to trigger RCM. Any other services which may supplied by the director not in capacity of Director like professional services , consultancy services , giving his property on rent to the Company will not be covered under reverse charge mechanism.
In such cases the Directors will be required to take registration (subject to threshold exemption of turnover) and charge GST from the Company / Body corporate and pay the same under forward charge mechanism.
b) Services should be provided by a Director which is not an employee of the Company:
As per Para 1 of Schedule III of the CGST Act,2017, services by an employee in the course of or in relation to his employment is not treated as supply of services and therefore payment of remuneration to employee directors would not be subject to GST being outside the scope of supply. Thus the question of payment of GST under RCM does not arise.
It may also be noted here that as per para 3(b) of Schedule-III the duties performed by any person as a Chairperson or a member or a Director in a body established by the Central / State Government or local authority and who is not deemed as an employee before commencement of this clause, as also not treated as supply of services. Thus in such cases also payment of GST under RCM is not required.
c). Services should be provided by a director of a Company or a body corporate to such Company or a body corporate:
Director services provided only to a Company or body Corporate are covered under ambit of reverse charge.
As per Explanation (b) to the RCM Notification, “Body Corporate” has the same meaning as assigned to it in clause (11) of section 2 of the Companies Act, 2013.
As per definition of “body corporate” under Section 2(11) of the Companies Act, 2013, it includes a private company, public company, one personal company, small company, Limited Liability Partnerships, foreign company etc.
However, body corporate does not include—
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in the Companies Act 2013), which the Central Government may, by notification, specify in this behalf.
In view of above payment of remuneration made to a Director of a co-operative society (being not a body corporate) will not be covered under reverse charge mechanism.
4. Advance Rulings of RCM on Director Remuneration / Services:
Hue and cry occurred among the corporates with the pronouncement of the following two advance rulings, which are discussed below:
1. Ruling pronounced by the Karnataka GST AAR, in case of M/s Alcon Consulting Engineers (India) Pvt. Ltd. dated 25th September 2019, wherein it was ruled that consideration paid by the company to its directors will attract GST under reverse change mechanism due to the reason that the services provided by the Directors to the company are not covered under S.No 1 of the Schedule III to the CGST Act as director is not the employee of the company.
2. In another ruling pronounced by Rajasthan GST AAR, in the case of Clay Crafts India Pvt. Ltd dated 20th February, 2020, it was ruled that as Notification 13/2017 Central Tax (Rate), dated 28-6-2017 (as amended) has specifically included services supplied by directors on which GST under RCM will be payable therefore consideration paid to Directors by the company will be taxed accordingly.
However above Rulings was followed by ruling of Karnataka AAR in the case of M/s Anil Kumar Agrawal dated 4th May,2020 came as relief for the corporates as it which has laid down a principle in regard to taxability of directors remuneration. Where such remuneration is received by an Executive Director, being employee of the company , the services of such a Director are neither treated as supply of goods nor as supply of services, in terms of Schedule III of CGST Act 2017.
However, AAR stated that in cases of nominated director viz non-Executive Director the remuneration paid by the company towards director services is exigible to GST in the hands of the company under reverse charge mechanism under section 9(3) of the CGST Act 2017, under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017.
Thus there were contradictory rulings of AAR, wherein some ruled that RCM will be applicable even on payment made to employee directors. Whereas in last ruling it was held by AAR that as services of employee directors are not a supply and thus no GST is to be paid under RCM.
5. CBIC Clarification of GST on Director Remuneration:
To put an end to all the doubts and confusion over applicability of GST on services supplied by directors to companies, the Government has issued Circular No – 140/10/2020 – GST dated 10th June 2020 . Clarification made by the Circular are based on below mentioned legal positions:
a. As per definition given under section 2(94) of the Companies Act, 2013, a whole time-director may be a person who is not an employee of the company.
b. Independent director as defined under section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it amply clear that such director should not have 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.
c. It has been deliberated in various courts that a director can function in dual capacities with a company – one wherein he has also entered into an employment contract with the company and secondly where he is working as a director of the company.
d. Income Tax Act, 1961 (‘IT Act’) also gives two different treatments to the remuneration received by the directors wherein the salaries paid to directors are subject to Tax Deducted at Source (‘TDS’) under Section 192 of the IT Act and other remuneration received like sittings fees, conveyance, boarding, lodging paid for attending Board meetings etc are liable for deduction under Section 194J.
The CBIC clarified as under:
No GST on Director remuneration declared as Salaries in the books
Part of Director’s remuneration which are declared as ‘Salaries‟ in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.
GST under reverse charge (RCM) on other director remuneration
It is further clarified vide said CBIC Circular that the part of employee 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 shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable. Further, in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.
6. Which tax is to be paid under reverse charge mechanism
The tax viz CGST + SGST / UTGST or IGST that is required to be paid under reverse charge mechanism on director services would depend upon as to whether the supply is inter-State or intra-State supply.
As per Section 7 and 8 of the IGST Act, a supply is regarded as inter-State supply wherein the location of supplier as well as place of supply, are in same State / UT. In case these are in different State / UT, same is treated as Inter-State supply.
Location of Supplier of Service
The location of supplier as per Sec 2(71) of the CGST Act, 2017 would be the registered place of business or unregistered fixed establishment or usual place of residence of the supplier, from which supply is being made.
In normal situations for arriving at location of supplier in case of Director Services the usual place of residence will be relevant and he may not be having a place of business or fixed establishment.
Place of Supply of Director Services
The place of supply in respect of director services would be the location of the recipient (registered company / body corporate) as per Section 12(2)(a) of the IGST Act, 2017.
In case the location of supplier and place of supply worked out as above are in different States / UTs, supply will be inter-State and IGST shall be applicable else CGST + SGST / UTGST will apply, which needs to be paid by recipient under RCM, if conditions as discussed above are fulfilled. Let us understand this with help of following illustration.
Illustration:
Mr A a resident of Mumbai, Maharashtra is a non executive Director in X Ltd (registered in Delhi). Mr A attended the Board meeting in Delhi for which sitting fee was paid to him by X Ltd. In this case the location of supplier is Mumbai, Maharashtra (usual place of residence of Mr A) while the place of supply is Delhi and thus X Ltd will be required to pay IGST under RCM on the director remuneration i.e. sitting fee paid to Mr A.
7. Rate of GST applicable on director remuneration / services:
Director Services are exigible to GST rate of 18%. Thus in case of intra-State supply, CGST @ 9% and SGST @ 9% will be applicable. On the other hand IGST @ 18% will be applicable on inter-State supply.
8. When GST under RCM is to be paid on director remuneration / services:
The liability for payment of tax in this case will be determined as per Section 13(3) of the CGST Act, 2017 wherein provisions regarding determination of time of supply of services covered under RCM are mandated.
According to provisions of Section 13(3), the time of supply for purposes of payment of tax under RCM, would be earlier of:
| Date of payment i.e. entry in books of debit in bank account, whichever is earlier OR |
| 61st day from the date of invoice of director services issued by the director. |
Example:
| Description | Date |
| Date on which Board Meeting (for which sitting fee is to be paid) was held | 25-03-20XX |
| Date of issue of invoice issued by Director | 07-04-20XX |
| Date of Payment – Case 1 | 10-05-20XX |
| Date of Payment – Case 2 | 10-07-20XX |
While determining the time of supply of services covered under reverse charge mechanism the date of supply is not relevant and thus the date of board meeting is not relevant. The time of supply is computed as under:
Case 1:
Time of supply will be the date of payment i.e. 10-05-20XX or 61st day from the date of invoice i.e. 07-06-20XX, whichever is earlier i.e. 10-05-20XX. Accordingly, tax, in this case, would be required to be paid by 20th/22nd/24th of June, 20XX with the filing of GSTR-3B in case of normal assessees.
Case 2:
Time of supply will be the date of payment i.e. 10-07-20XX or 61st day from the date of invoice i.e. 07-06-20XX, whichever is earlier i.e. 07-06-20XX. Accordingly, tax, in this case, would be required to be paid by 20th/22nd/24th of June, 20XX with the filing of GSTR-3B in case of normal assessees.
9. Availing of Input Tax Credit of GST paid under RCM on director remuneration:
The sitting fee etc paid to non executive directors are paid for business purposes and thus ITC as per Section 16 of the CGST Act, 2017 can be availed provided the Company / body corporate is engaged in taxable supplies.
However it is important to note that in such a case a self invoice as mandated under Section 31(3)(f) of the CGST Act,2017 will have be raised by the company / body corporate as the Director will normally not be registered under GST Law.
As per Rule 36(1)(b) of the CGST Rules, 2017, input tax credit of tax paid under RCM (on supplies from unregistered persons) can only be availed on basis of such an self invoice, subject to payment of tax.
For further details on issuance of self invoice click here.
10. Concluding remarks
Director services were earlier also covered under reverse charge mechanism in Service tax law and same has been continued under GST regime as well.
Payment of remuneration to non executive Directors i.e. independent directors, nominee directors etc are only covered under ambit of reverse charge mechanism. The payment of remuneration to executive Director are regarded as payment to employees and thus outside the ambit of GST, in light of CBIC Circular No – 140/10/2020 – GST dated 10th June 2020. It should be ensured by the Company / Body corporate that payments to executive directors are declared as ‘Salaries‟ in the books of a company and subjected to TDS under Section 192 of the IT Act.
Any 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 shall be subject to GST under reverse charge.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
