- March 4, 2020
- Posted by: Aditya Kumar
- Category: Uncategorized
Defining the Issue
The inclusive nature of “Supply” under GST has always shown a wide scope and led to many ambiguities with respect to chargeability of GST. One such ambiguity which is a trending grey area is the services provided by the directors of a company.
Schedule III of the CGST Act, 2017 (hereinafter referred to as the Act) provides the exclusion list for the events which shall neither be considered to be supply of goods nor supply of services. One such exclusion pertains to “Services within Employer-Employee Relationship”.
Prior to Sept’19(i.e. when the ruling was passed by AAR-Karnataka), it was well clear that services provided by directors under the capacity of an employee shall not even constitute a supply, leaving behind any other unanswered questions. However, a couple of AARs in the near past have opened Pandora to huge anomalies which may cope, as a result of these rulings.
Any registered person receiving or availing the services contained in section 9(3) of the Act shall deposit the amount of tax under reverse charge to the tax authorities on the behalf of the supplier.
The CBIC vide Notification No. 13/2017 dated 28th Jun’2017 introduced the applicability of RCM on services provided by the directors of the company. The entry no. 6 of such notification provides the following:
|Category of Supply of Service||Supplier of Services||Recipient of Services|
|Services supplied by a Director of a company or a body corporate to the said company or body corporate||A director of a company or a body corporate||A company or a body corporate located in the taxable territory|
Before delving further, it is better that we get through what has been decided upon in the Advance Rulings. The relevant extract has been reproduced as under:
- Alcon Consulting Engineers (India) (P.) Ltd., Authority of Advance Ruling, Karnataka held: –
“Regarding the remuneration to the directors paid by the applicant, the services provided by the Directors to the company are not covered under clause 1 of the Schedule III to the Central Goods and Services Tax Act, 2017 as the director is not the employee of the company. The consideration paid to the Director is in relation to the services provided by the Director to the company and the recipient of such service is the company as per section 2(93) and the supplier of such service is the director.”
Clay Craft India (P.) Ltd, Authority of Advance Ruling, Rajasthan held: –
“It is further observed that consideration paid to the Directors is against the supply of services provided by them to the applicant company and are not covered under clause (1) of the Schedule III to the CGST Act, 2017 as the Directors are not the employee of the Company. In the instant case Director is the supplier of services and the applicant company is the recipient of the services. So, it is very clear that the services rendered by the Director to the company for which consideration is paid to them in any head is liable to pay GST under RCM.
It is also observed that the applicant company is located in the taxable territory and the Director’s consideration is paid for the supply of services by the Directors to the applicant company and hence the same is liable to GST by way of reverse charge basis as provided under Notification No. 13 /2017- Central Tax (Rate) dated 28-6-2017 issued under section 9(3) of the Central Goods and Services Tax Act, 2017.
Notification No. 13/2017- Central Tax (Rate) dated 28-6-2017 has given the distinct identity to the services provided by the Director and specifically included in the category of service on which GST will be payable under RCM.”
Let us accept the fact that neither the word “Director” nor the word “Employee/Employer” has been defined under the Act. While for the definition of “Director” reference can be made to Companies Act, for finding the definition of “employee” a referral can be made to Income Tax Act, ESI/EPF provisions etc. Nevertheless, at this point of time, it is better that we attain a bird eye view to some important definitions
- COMPANIES ACT: – “Director” includes a director in the employment of the company.
- INCOME TAX ACT: – Section 192 provides that any person responsible for payment of Salary should deduct Income tax on the amount of Salary Payable.
- EPF ACT: – Any person who is employed for wages in any kind of work, manual or otherwise in or in connection with the work of an establishment, and who gets wages directly/indirectly from the employer.
In a normal trade parlance, there are numerous services which a director renders to his company for which he/she is compensated. Some of them might be listed as under: –
- Sitting fees
- Consultancy Fees etc.
In furtherance, there are distinct varieties of Directors required/covered under Companies Act some of which might be Independent Director, Executive Director, Non-Executive Director etc.
Issues to be Resolved
Q1. Whether Directors constitute an Employee or Not?
Executive Directors: These are the directors who are entrusted with day-to-day operations of the company. On the conjoint reading of Income tax Act,1961 & EPF Act, 1952, Executive Directors are in fact the employees of the company. These include:
· Managing Directors
· Whole Time Directors
Therefore, Any Income which Executive Directors obtain in the course of their engagement as an Executive Director shall not constitute a supply and therefore lie outside the ambit of GST no matter what.
Non-Executive Directors: These are the directors which only attend the meetings of the Board of Directors or its committees and thus work only at a periodic interval on a part time basis such as Independent Directors. Hence, they are not entrusted with day to day operations of the company and hence cannot be treated as an employee.
Since they are not treated as an employee of a company, the services provided by them are not covered in the ambit of an employer-employee relationship. The services provided by them shall be liable to tax under Reverse Charge Mechanism in the hands of the applicant-company as per Entry No. 6 of Notification No. 13/2017-Central Tax (Rate), dt. 28-6-2017.
Q2. If Yes, what are the Incomes earned by directors chargeable to GST?
Since incomes earned by executive directors in their capacity are specifically excluded, all other transactions entered between the company and the director whether it be a Non-Executive Director or an Executive Director shall be subject to Reverse Charge.
While the same issue was also subject to litigations in the Pre-GST era, there were equal orders in the favour of the assessee that such remuneration was not subject to Service Tax. One may also refer to “Allied Blenders and Distillers (P.) Ltd. v. Commissioner of Central Excise & Service Tax, Aurangabad” wherein a similar issue was raised and decided that services by Whole Time Directors were covered under the purview of Employee services.
Therefore, the key takeaways are: –
No GST on salary to any person including director.
Forward charge in case the director is providing any service in the capacity other than director.
RCM on all amounts paid to the director except mentioned above paid to him which is in relation to his directorship example sitting fees, professional charges for professional director and like items.
It is worth mentioning that while we at ashwani & associates hold the above view, we cannot be ignorant to the fact that there are advance rulings which hold a contrary view and accordingly, litigation on this issue cannot be ruled out.