Taxability on Remuneration Paid to Directors Under GST
Recently in the matter of Clay Crafts India Private Limited [TS–218–AAR–2020–NT], the Rajasthan Authority for Advance Ruling (“AAR”) stated that consideration paid to directors is against the supply of services provided by them to the company and are not covered under clause (1) of the Schedule III of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) as Directors are not employee of the Company (irrespective of the facts related to terms of appointment of director, TDS & PF deductions, etc) and such services are liable to GST under reverse charge in terms of Entry No. 6 of Notification No. 13/2017 – Central Tax (Rate) dated June 28, 2017.
For levy of GST, in terms of section 9 of the CGST Act read with section 5 of the Integrated Goods and Services Tax Act, 2017 (“the IGST Act”), the transaction must be covered under the definition of supply as provided under Section 7 of the CGST Act. Section 7(2)(a) of the CGST Act provides that the activities or transactions specified in Schedule III would be treated neither as supply of goods nor supply of service. Section 7(2) of the CGST Act is a non-obsolete clause which overrides Section 7(1) ibid which means even if an activity is covered under scope of supply then the same would not be treated as supply of goods or services when it gets covered under Schedule III of the CGST Act.
Clause (1) to Schedule III read with Section 7 of the CGST Act provides that services by an employee to the employer in the course of or in relation to his employment shall neither be treated as supply of goods nor supply of services. The term ‘employee’ is not defined in GST laws and the same must be understood in common parlance and with the aid of other laws.
It may be noted that GST is a conglomeration of various erstwhile indirect tax laws like Service tax, VAT, etc. Similar provisions w.r.t. the present case under discussion was existent under Service tax as well. Recently, in the matter of Allied Blenders And Distillers (P.) Ltd. Vs. CCE {[2019] 101 taxmann.com 462 (Mumbai – CESTAT)}, (pertaining to service tax laws), the Hon’ble Mumbai Tribunal held that where company paid remuneration to its four whole-time Directors for managing day-to-day affairs of company and made necessary deductions on account of Provident fund, Professional Tax and TDS as applicable and declared these Directors to all statutory authorities as employees of company, remuneration paid to Directors was nothing but salary and assessee was not required to discharge service tax on remuneration paid to Directors.
Hence, in our view, where the terms of employment of director is same in all respect to that of any other employee of the company, then there should be no GST liability and in other cases, the company needs to pay GST liability under RCM. Further, the subject ruling by the Hon’ble AAR doesn’t seem to be the true intent of the legislature and considering the impact on industry as a whole, some clarification or relaxation from GST Council is expected in the near future.
What can be derived is:
- Executive Directors, Managing Director, Whole Time Directors being in whole-time employment of the Company are an employee of the Company. Whereas, non–executive directors are not the employee of the Company.
- Any services provided by Executive Directors within the scope of employment will be covered under schedule III i.e. service provided by employee to employer in the course of or in relation to his employment will not be considered as supply of goods or services.
- Apart from services covered in scope of employment, any other services i.e. of professional nature and sitting fees will paid to executive directors will be chargeable to GST under reverse charge mechanism.
- Any payment made to non-executive directors will be chargeable to GST under reverse charge mechanism.
