Relevant Provisions
Schedule III of the CGST Act, 2017 contains activities or transactions which shall neither be treated as supply of goods nor a supply of services
Entry No. 1 of the same schedule has been mentioned below for reference
“Services by an employee to the employer in the course of or in relation to his employment.”
Entry 6 of the Notification No. 13/2017- Central Tax (Rate) dated 28th June, 2017 requires that body corporate or companies shall pay tax under reverse charge mechanism where the Services are supplied by a director of a company or a body corporate to the said company or the body corporate.
Test to determine Employee
Primary issue to be decided is whether or not director is an employee of the company
Whole Time Director in terms of Section 2 (94) of the Companies Act, 2013 has been defined in an inclusive manner and it may so happen that he may be a person who is not an employee of the company.
While being an Independent Director in Company requires that Director should not have been an employee of the company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed.
Issue
In the recent past various advance ruling authority has given their ruling which are in contradiction of each in other with respect to certain matters. Therefore clarification as to treatment of director remuneration was required whether it gets covered in Schedule III or tax has to be paid under Reverse Charge Mechanism (RCM) .
Relevant post : RCM on Director Services
Clarification on Leviability of GST
The aforementioned issue has been examined under following 2 categories
- Independent Directors or Directors who are not employee
- Whole-time directors including managing director who are employees
The Board Vide Circular No: 140/10/2020 – GST dated 10th June, 2020 has clarified as follows
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Independent Directors or Directors who are not employee
The company is liable to discharge applicable GST on reverse charge basis where the services are provided by the directors who are not an employee of the said company.
Accordingly, it is hereby clarified that the remuneration paid to such independent directors, or those directors, by whatever name called, who are not employees of the said company, is taxable in hands of the company, on reverse charge basis.
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Whole-time directors including managing director who are employees
It would be pertinent to examine whether all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service”) or is there any element of “contract for service”.
The issue has been deliberated by various courts and it has been held that a director who has also taken an employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other on the basis of the contractual relationship of master and servant with the company, i.e. under a contract of service (employment) entered into with the company.
| Treatment in Books of Accounts | Clarification about Leviability |
| The 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 | 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. |
| 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 | Treated as consideration for providing services and therefore taxable. the Company, is liable to discharge the applicable GST on reverse charge basis. |
Therefore from the above table it can be inferred that leviablility of GST on director remuneration where director are employee of the company are directly annexed with treatment given to under under the Income Tax Act, 1961.
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Mr. Setia is a CA by Profession and expert in the field of Indirect Taxation Based in Delhi. Rich experience of over 5 year.