CBIC issues Clarification in respect of levy of GST on Directors' Remuneration

The Central Board of Indirect Taxes & Customs(CBIC) issued Clarification vide Circular No.140/10/2020-GST on June 10,2020 putting an end to the huge commotion generated by the contrary rulings of various Advance Ruling Authorities(AAR) on the applicability of GST on Remuneration paid to Directors of a Company.

Various Doubts were posed as to whether the GST is leviable on Director's Remuneration paid by companies to their Directors falls under the ambit of entry in Schedule III of Central Goods and Services Tax Act,2017 (CGST Act) i.e. "services by an employee to the employer in the course of or in relation to his employment" or whether the same is liable to be taxed in terms of notification no.13/2017-Central Tax(Rate) dated 28th June 2017(entry no.6).

The issue of remuneration to directors has been examined under the following two different categories:

i) Leviability of GST on remuneration paid by companies to the independent directors defined in section 149(6) of the Companies Act, 2013 or those directors who are not the employees of the said company; and 

ii) Leviability of GST on remuneration paid by companies to the whole-time directors including the managing director who are employees of the said company.

CBIC has expounded on this issue in the following manner:

The Primary issue to be decided is whether or not a "Director" is an employee of the company. On Perusal of relevant provisions of Companies Act, 2013 such as section 2(94) which clearly states that Whole Time Director may include a person who is not an employee of the company While reading of section 149(6) of Companies Act,2013 along with Rule 12 of Companies (Share Capital and Debenture) Rules, 2014, makes it amply evident that appointment of any person as an Independent Director comes with a pre-condition that such person should not have been an employee of the company or proprietor or a partner of the said company in any of the preceding 3 financial years immediately preceding the financial year in which he is proposed to be appointed as an Independent Director.

Therefore, in respect of such directors who are not the employees of the company, the services provided by them in lieu of remuneration as consideration are outside the scope of Schedule III of CGST Act and therefore taxable under GST on reverse charge basis as per entry at S.I. No.6 of Notification no.13/2017-Central Tax(Rate) dated 28th June 2017.

Once, it has been ascertained that a Director irrespective of name and designation, is an employee, it would be pertinent to examine whether all the activities performed by the director are in course of employee-employer relation or is there any element of "contract for service".This issue has been deliberated in Various Courts wherein it was found that Director may be functioning in dual capacities namely, one as a director and the other hand on the basis of a contract of service(employment) entered into with the company.

Similar identification and treatment of Director's Remuneration are also present in the Income Tax Act,1961(IT Act) wherein the salaries paid to directors are subjected to "TDS" under Section 192 i.e. TDS on Salaries Paid. However, in cases where the remuneration is in the nature of professional fees and not salary, the same is liable fo deduction under section 194J of the Income Tax Act.

Accordingly, it is clarified that part of Director's Remuneration which is declared as "Salaries" in the books of a company and subjected to TDS u/s 192 of the IT Act is not taxable under GST on reverse charge basis as they are considered as consideration for services by an employer to employee in relation to his employment in terms of Schedule III of the CGST Act,2017.

While it is further clarified that the part of Employee Director's Remuneration declared separately other than 'salaries' in the Company's books of accounts subjected to TDS under Section 194J of the IT Act as "Fees for Professional or Technical Services" shall be taxable under GST on reverse charge basis as these will be treated as consideration for services outside the scope of Schedule III of CGST Act,2017.

Source: www.cbic-gst.gov.in

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