1. Remuneration to Directors under GST
CA N.RAMASWAMY, F.C.A.
CHENNAI- 600024
PH- 04443512423
MOBILE: 9840446412
EMAIL: nryrams@gmail.com
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CA.N.RAMASWAMY
2. Background
•In terms of notification 13/2017-Central Tax Rate dated 28-6-2017,
Central Government in exercise of power conferred by section 9(3)
of the Goods and Services tax Act 2017, on the recommendation of
the GST Council, has notified categories so supplies of services , tax
on which shall be paid on REVERSE CHARGE BASIS.
•Sr. No 6 of the said notification specifies that “ services supplied by
a Director of a company or o body corporate to the said company
or body corporate” are liable to Goods & service tax under reverse
charge basis and The company or a body corporate located in the
taxable territory which receives the said services are the person
liable to pay the tax.
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3. Liability ReverseCharge mechanism
“Reverse charge” means the liability to pay tax by the
recipient of supply of goods or services or both instead of
the supplier of such goods or services or both 2(98) of
CGST Act.
by virtue of section 9(3) of Central Goods and Services Tax
Act, 2017 and section 5(3) of Integrated Goods and Services
Tax Act, 2017, the Government on recommendations of
council may specify categories of supply of goods or
services or both wherein tax shall be paid under reverse
charge.
Govt has issued Notification specifying the goods, Services
which are liable to tax under Reverse charge Mechanism under3
section 9(3) / 5(3) 3
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4. Sec 9 (3) of CGST
ActThe Government may, on the recommendations of the
Council, by notification, specify categories of supply of goods
or services or both, the tax on which shall be paid on reverse
charge basis by the recipient of such goods or services or
both and all the provisions of this Act shall apply to such
recipient as if he is the person liable for paying the tax in
relation tothe supply of suchgoods or services or both.
Similar provision is made in the IGST Act as well as state GST
Acts.
It may be noted that similar provisions existed under erstwhile
Service tax regime under notification issued there under
where the services by Directors too were liable to Tax under
Reverse charge Basis
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5. Services by Directors - Reverse charge
Accordingly any services rendered by a director of a company or a body corporate to the
said company or body corporate is liable to GST to be discharged by the recipient of
service namely the company or body corporate situated in the taxable territory as per Sr.
NO 6 of the said notification. SAC code will be 999799 & rate of tax is 18% GST.
Services supplied by a director
of a company or a body
corporate to the said company
or the body corporate
A director of a company or
a body corporate
The company or a body
corporate located in the
taxable territory.
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6. CurrentissuesoverRemunerationtodirectors
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it pertinent to note that there can be various services which can be
provided by the Director to the company and for which the payment is
made by company. Some of the examples are;
1. Services as a director/employee for which director remuneration is
paid
2. Renting of immovable property
3. Commission on certain transaction
4. Sitting fee
5. Independent Professional/advisory fee
Now, the question arises whether the above services provided by the
director would be treated as supply and consequently the payment made
by company would be liable to tax under reverse charge?
CA.N.RAMASWAMY
7. CurrentissuesoverRemunerationtodirectors
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it pertinent to note that there can be various services which can be provided by the
Director to the company and for which the payment is made by company. Some of the
examples are;
1. Services as a director/employee for which director remuneration is paid
2. Renting of immovable property
3. Commission on certain transaction
4. Sitting fee
5. Independent Professional/advisory fee
Now, the question arises whether the above services provided by the director would be
treated as supply and consequently the payment made by company would be liable to
tax under reverse charge?
Recently Advance Authority for Ruling has rendered decisions on the above issue
Directors remuneration holding that such payment attract GST under Sr. No 6 of the
notification issued in exercise of power conferred under section 9 (3) of the CGST Act
2017.
CA.N.RAMASWAMY
8. AAR DECISIONS ON THE ISSUE.
IN RE: M/S. ALCON CONSULTING ENGINEERS (INDIA) PVT. LTD.( 2019 (10) TMI 793 -
AUTHORITY FOR ADVANCE RULING, KARNATAKA) 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
clause (93) of section 2 of the CGST Act and the supplier of such service is the Director.
Since the applicant is the company and is located in the taxable territory and the
Directors’ remuneration is paid for the services supplied by the Director to the
applicant company and hence the same is liable to tax under reverse charge basis
under section 9(3) of the CGST Act, 2017.
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9. AAR DECISIONS ON THE ISSUE.
IN RE: M/S. CLAY CRAFT INDIA PVT. LTD.,( 2020 (4) TMI 228 - AUTHORITY FOR
ADVANCE RULING RAJASTHAN) The 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 Ill 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
The consideration paid to the Directors by the applicant company will attract GST under
reverse charge mechanism as it is covered under entry No. 6 of Notification No.
13/2017 Central Tax (Rate) dated 28.06.2017 issued under Section 9(3) of the CGST Act,
2017.
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10. Applicability of these decisions
Both the decisions rendered by different AARs have pronounced identical decisions on
the issue of applicability of GST on remuneration paid to the directors of the company .
However the Learned authorities have not considered one important aspect in relation
to the issue namely “ whether the director of the company is an employee or not “ .
The said decisions merely assumed that section 9 (3) is applicable and notification
issued there under is applicable as well for the simple reason that Sr. NO takes reference
“ Services rendered by Director”. The said Entry would apply to “services rendered by a
director”. But the same will not apply to remuneration paid to a director as against any
other consideration paid to a director such as sitting fees, Commission, independent
other professional services etc.
More over the decisions by AAR of JRISDICTION IS APPLICABLE TO the applicant in that
jurisdiction and not to any one else . Thus Decisions of AAR has no binding effect on
thers, though it may have some persuasive value.
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11. Applicability of RCM in these cases.
From the definition in section2 (98) and charging section in section 9 (3) and the relevant
notification 13/2017, it could be seen that RCM would become applicable only in the
event of Central tax is leviable. In other words taxability of a particular service is to be
established under the provisions of the ACT, before resorting to liability under RCM
As per section 7(2) of the CGST Act 2017, (a) activities or transactions specified in
Schedule III; or (b)…. shall be treated neither as a supply of goods nor a supply of services
Entry NI 1 in Schedule III is Services by an employee to the employer in the course of or
in relation to his employment.
In the case of remuneration paid to directors , these are neither goods nor services as per
Entry NO 1 of the Schedule III which specifies items which are neither considered as
goods nor Services. Thus Remuneration paid to Directors are arising out of employer
and employee relationship and therefore are neither services nor goods. And therefore
not taxable per se. Hence RCM can not be applied to such transaction that arise an
account of employer/ employee relationships.
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12. Employee- employer relationships..
Similar provisions existed during the service Tax regime as well. Govt had issued a
Circular No. 115/09/2009 – ST dated 31-07-2009, whereby it was clarified in para 3 that
remunerations paid to Managing Director / Directors of companies whether whole-time
or independent when being compensated for their performance as Managing
Director/Directors would not be liable to service tax.. Thus Service Tax on remuneration
paid to a director was not liable for Tax under Reverse Charge.
Under Income Tax Act: The remuneration paid to the director of the company is offered
to tax under the head “ Income from Salaries”. Thus the contractual relationship is
employer Employee. The company is also liable to deduct tax from the employees under
section 192 of the Income Tax Act 1961 under the head Salaries and are required to
issue certificate for deduction of taxes in form no 16. In case of other payments to the
directors like commissions, independent professional services The company is required
to deduct Tax under relevant section and are required to issue a certificate for deduction
taxes in From NO 16 A . Thus there is a clear distinction to show whether the payment is
for “Salaries” or for supply of services other than salaries
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13. Employee- employer relationships..
Under the companies act 1956, payment of Salaries to Directors have to be approved
for by competent authority. Thus there would be sufficient distinction to show payment
made to directors as “ Salaries “ and other payments for services, these payments get
disclosed in the published accounts.
Thus there will be clear breakup and proof to show categories of payments made to
Directors such Salary, Commission, professional services and other services as Rent etc.
Should the payment be an account of employee employer relationship, then NO GST
Liability arises under Reverse Charge on the basis of proof being adduced like
employment contract, approvals and disclosures under the companies Act, Deduction of
TDS under Income Act. Payment made to the director is for other services then GST
liability will be fastened under Sr. No 6 of notification 13/2017 dated 28-6-2017 on the
recipient company.
The CBIC has issued a board circular no 140/10/2020-GSTdated 10th June 2020 clarifying
whether the GST is leviable on Director’s remuneration paid by companies to their
directors
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14. Recent Notification issued by the Board..
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Particulars Nature of Relationship Remarks
Whole time Director/
Independent Director
Such directors can not be
employees of the company.
Liable to RCM vide
notification 13/2017.
Refer 4.2 of clarification
Directors by whatever
name called having a
contract of service
Employee -employee
relationship- established with
evidences like contract of
employment, TDS Details etc.
No taxable under GST –
covered by Sr. No-1 of
Schedule III of the GST
Act , 2017 Refer 5.3
Directors by whatever
name called having a
contract for service
Services are for professional
services based on Service
Contracts , TDS under section
194-J
Liable to RCM vide
notification 13/2017.
out side Schedule III
Refer 5.4 of clarification
Rent Paid to Directors. As owner of Property which
are Let out for commercial
purposes.
Liable to forward
Charge as the same is
not covered under
Schedule III. covered as
Service only.
CA.N.RAMASWAMY
15. .
Thank You
N.Ramaswamy B.Com, F.C.A.
Shri Abhisekavalli Flats
163-164, Rangarajapuran main Raod
Kodambakkam, chennai 600024
Happy Reading
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