Clearmytax.in Editorial Board
- Introduction
A lot of hue and cry has been there regarding taxability of director’s remuneration under GST law, subsequent to ruling pronounced by Rajasthan AAR in the matter of M/s Clay Craft India Pvt Ltd vide Order No. RAJ/AAR/2019-20/33 dated 20th February,2020.
The AAR in this matter, while holding that salary so paid to Directors is taxable under reverse charge observed that the consideration paid to Directors is against supply of services provided by them to applicant as directors are not employee of the Company. It was further observed that Notification No. 13/2017 has given distinct identity to the service provided by the Director and specifically included in the category of service on which GST will be payable under RCM.
It is important to note that above ruling was pronounced sans considering the different types of directors as per Companies Act, viz Executive Director, Whole time Director, Nominee Director, Independent Director etc. Due to this the above ruling was regarded not to be on sound footing by the Industry and GST professionals.
2. Recent ruling of Karnataka , AAR
Karnataka AAR in the matter of M/s Anil Kumar Agrawal vide Order No. KAR ADRG 30/2020 dated 4th May,2020 has delved inter-alia upon the issue of taxability of salary received as Director from a Private Limited Company and gave its ruling in this regard at para 7.8 of the order, which is reproduced below:
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 28.06.2017.
In the instant case the applicant has not furnished any documentary evidence such as copy of agreement between the applicant and the said private company, copy of appointment order, details of ESI, PF deductions etc., so as to decide whether the applicant is in receipt of salary as an employee or as an independent director. Thus in the absence of any documentary evidence, it is not possible to decide whether the amount received by the applicant is towards his services as an Executive Director or a Non-Executive Director.
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. Further if the applicant receives the remuneration as a Non-Executive Director, such remuneration is liable to tax 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 28.06.2017. Thus the value of the said services of the applicant being a Non-Executive Director are includable in the aggregate turnover, as it is the value of the taxable services supplied by the applicant, though the tax is discharged by the private limited company, under reverse charge mechanism.
3. Analysis of the Ruling
Thus as per above latest ruling of Karnataka AAR 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. Consequently in this case, Director remuneration is not included in the aggregate turnover of such Director.
However 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.Further such an amount shall also be included in the aggregate turnover of such a Director.
The above ruling is on right footing and is in line to the CBIC (then CBEC) Circulars issued and various judicial pronouncements under service tax regime. It provides sigh of relief to Corporates as they were in dilemma after Rajasthan AAR ruling in M/s Clay Craft India Pvt Ltd case.
Needless to mention here that in case any consultancy services etc are provided by a Director which are outside the normal scope of service as a Director, the tax in such cases would be paid by Director under forward charge mechanism.
4. Way forward:
The applicability of GST on director services hinges upon as to whether the Director is providing services as an employee or not. This needs to be adjudged based upon various factors (terms of engagement of director, treatment under Income Tax Act etc) and taking reference from Companies Act, 2013.
Where services are provided qua an employee to the Company, salary, commission etc paid to such director shall fall outside ambit of GST. However in case of non executive / independent / nominee Director any remuneration paid in form of commission, sitting fee etc towards director services shall be taxable under reverse charge mechanism in the hands of the Company.
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For ready reference of the readers the copy of order of Karnataka AAR is given below:
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.
