RCM on Director Services

Share the Knowledge
2,614

RCM on services of Directors

 

Section 7 of the CGST Act provides an inclusive definition of supply that includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course of furtherance of his business.

Schedule III of the CGST Act further provides certain transactions which shall be treated neither as a supply of goods nor a supply of services. Entry 1 of the said schedule states services by an employee to the employer in the course or in relation to his employment thereby excluding the services performed by the employee in the course of his employment out of the purview of GST.

 

Entry 6 of Notification 13/2017 dated June 28, 2017 provides for RCM implications on the services rendered by the director of a company or body corporate to the said company or body corporate thereby creating an onus on the company to pay taxes under RCM on the said services supplied by directors.

 

Question arises as to which class of services shall be considered as services rendered by the director and which out of them shall stand out of the purview of the said notifications

There are certain class of directors that are serving the company in their capacity of being employee for which remuneration is being granted to them for the services rendered in the course of their employment. Such remuneration is governed by S. 197 of the Companies Act 2013 providing a capping of 11% of the net profits of the company (in absence of a Special resolution for more than 11%)to be distributed to the directors in employment in the form of remuneration. Such services being services in the course of employment shall stand out of the purview of CGST Act vide Entry 1 of the Schedule III of the CGST Act 2017 and the services performed by the directors otherwise than in course of employment shall attract RCM. Directors such as Whole Time Directors, Managing Directors and Ordinary directors are serving the company during the course of their employment and hence their services performed as an employee shall stand out of GST.

 

Types of Directors

Types of Directors Meaning Definition as per Companies Act 2013 RCM implication on services rendered by the respective Director
1.Whole Time Director Section 2(94) of the Companies Act, 2013 defines the term ‘whole-time director’ as a director, who is in the whole-time employment of the company. Since the director is working in the course of employment hence his services performed as an employee shall not be leviable to RCM.
2. Managing Director Section 2(54) of the Companies Act, 2013 defines ‘Managing Director’ as a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.

 

 Judgement in Employees’ State Insurance Cooperation vs Apex Engineering Pvt Ltd stated that Managing director of the company shall also be termed as an employee since he is in whole time employment.

 

By virtue of the above said ruling it can be concluded that the services performed by Managing Director in the course of employment shall stand out of RCM implications.
3. Executive Director Rule 2(1)(k) of the Companies (Specification of definitions details) Rules, 2014 defines it to mean a whole Time Director as defined in Section 2(94) of the Companies Act, 2013. Since the Executive director is given the same description as that of WTD, his services as an employee shall also stand exempted by virtue of Schedule III of the CGST Act.
4. Non-Executive Director Non- Executive director, non being specified will be the one not being an Executive Director. Non-Executive director, not serving the company in relation to an employment agreement shall be classified as providing services independent to the one specified above and accordingly shall be leviable to RCM.
5. Independent Director Section 149(6) of the Companies Act 2013 defines Independent Director in relation to a company a director other than a managing director or a whole-time director or a nominee director, who is a person of great integrity and possesses relevant expertise and experience Since services by an Independent director has been kept separated from the one specified to be serving in terms of their employment agreement, services provided by him shall according be chargeable under RCM and taxed at appropriate rates.

 
6. Nominee Director Nominee director is the one appointed by the institution that has invested in or lent to the company. Companies Act 2013 states that Nominee director cannot be same as independent director By virtue of explanation as inserted in Companies Act 2013, it can be said that nominee director is also serving in the course of employment, not being employed by the company but the institution and is thereby eligible for remuneration and accordingly said service shall stand out of the purview of GST vide Entry 1 of Schedule III.

 

By referring the above descriptions and related services performed by the directors, it can be concluded that services performed in personal capacity other than the one stated in employment agreement shall be liable to be taxed under RCM.

Director sitting fee as stated in s. 197(5) of the Companies Act 2013 entitles every director to be receive fee by way of sitting fee for attending meetings of the Board or Committee or for any other purpose whatsoever as may be decided by board. The said fee is independent of the one paid in course of employment and thereby shall attract RCM implications whether paid to WTD, MD or any independent director as the case may be.

Tags:

This Post Has 0 Comments

Leave a Reply