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The curious case of GST on director’s remuneration

The question of Service tax and GST on director’s remuneration has always been a litigious one. In this article, we examine the indirect tax position on director’s remuneration by way of judicial rulings during the Service tax regime as well as under the GST regime.

Position of law under Service tax regime:

Under the service tax regime, the services provided by a director of a body corporate to the said body corporate was covered under reverse charge provisions vide Notification No. 30/2012-Servce Tax, dated 20/06/2012.

Mumbai CESTAT’s order in case of Allied Blenders and Distillers Pvt. Ltd. Versus Commissioner of Central Excise & Service Tax, Aurangabad had set at rest the controversy at least under the Service tax regime. It is worthwhile to examine in detail, the order of Mumbai CESTAT because the position of law under Service tax regime and under present GST law substantially remains the same. 

The salient points of the tribunal’s order are –

• Facts – During the course of audit, on scrutiny of the records of the company, it was found by the department that the company had been receiving services from the directors, but had not made payment of service tax under reverse charge mechanism, on the remuneration paid to the directors, in accordance with Notification number 30/2012–ST dated 20.06.2012. Consequently, demand was raised on the company. On adjudication, the demand was confirmed with interest and equal amount of penalty. Hence, the company preferred appeal to the CESTAT, Mumbai.
  

• Argument of the Company– The company, i.e., appellant made their case as under:
  
  • There was no bar under the earlier or present Companies Act for an employee to be director of the company,
  • The Companies Act recognizes that a director can be in whole time employment of the company which is clear from the definition of ‘whole time director’ laid down at section 2(94) of the Companies Act,
  • Further as per Section 2(60) of the companies act, the whole-time director, is an officer of the company which means that he is an employee of the company,
  • The company had deducted TDS under the head of salaries as per the Income tax act,
  • The company had deducted PF and deposited the same with their own contribution with the authorities,
  • The remuneration of the said employee-directors was also decided and controlled by the company.
  • The manner and the method to be adopted by the employee-directors for discharging their functions were subject to supervision and guidance of by the board of directors.
  • The company also had complete discretion and freedom to terminate the services of the whole-time director,
  • The company could divest any of the directors of their functions ,
  • None of the employees or employee-director could claim any kind of protection or privileges qua the company, if their services as employees were terminated.

• Argument of the Departmental Authorised Representative– The departmental A.R. made their case as under:
  • The words, ‘employer’, ‘employee’ and ‘salary’ have not been defined under the Finance Act, 1994, Income Tax Act, 1961 nor under the Companies Act, 1956,
  • The provisions of Companies Act, 1956 is not dealing with employer-employee relationship,
  • The plea of the appellant that the Directors are being paid salary, HRA, PF and Form-16 issued after deduction of TDS, hence be treated as an employee, is not correct, as the employer- employee relation is not supported by the Article of Association/Memorandum of Association nor any separate agreement between the company and these Directors,
  • Merely on deduction of Income Tax at source cannot be considered that the Director and the Company has employer and employee relationship. It is the agreement between the employer i.e. company and the Director would reveal the exact relationship between them. In the present case, no such agreement exists between the employer and the Directors, hence there exists no employer-employee relationship.
  • PF was deducted in case of one director, while in case of another director, PF was not deducted, hence, PF cannot be considered as acceptable criteria,
  • Hon’ble Allahabad High Court in the case of Sandip Kohli Vs. CIT vide order dt.19^th July2012 in Income Tax Appeal Nos20-29 of 2001 submitted that the standard deduction claimed from the remuneration paid to the director was not allowed considering nonexistence of employer-employee relationship,
  • Merely receipt of remuneration for holding office did not necessarily give rise to the relationship of master and servant. Referring to the observation of the judgment of Hon’ble Supreme Court in Fortis Healthcare Ltd. – 2016-SCC Online ITAT 3382, the learned AR submitted that while distinguishing the “contract for service” and “contract of service”, it was observed that there exist no employer and employee relationship.

• Observation of the bench–
  • The bench placed reliance on Form 16 issued to the director showing deduction of tax at source under the head ‘Salaries’,
  • The bench placed reliance on the PF deduction from payment made to director and the PF return filed by the appellant company,
  • The bench placed reliance on the Form 32 filed by the company with the RoC showing the director as an executive director,
  • Allowing the appeal, the bench remarked in paragraphs 16 and 17 of their order as under –

    • “16. Also, from the documents produced by the Appellant it is crystal clear that the Directors who are concerned with the management of the company, were declared to all statutory authorities as employees of the company and complied with the provisions of the respective Acts, Rules and Regulations indicating the Director as an employee of the company. No contrary evidence has been brought on record by the Revenue to show that the Directors, who were employee of the appellant received amount which cannot be said as ‘salary’ but fees paid for being Director of the company. The Income Tax authorities also assessed the remuneration paid to the said directors as salary, a fact cannot be ignored. The judgments cited by the revenue cannot be applied to the present case as the facts are different and the finding of Income tax authorities accordingly also different in the said case.

    • 17. In these circumstances, we do not find merit in the impugned order. Consequently, the impugned order is set aside and the appeal is allowed.”

In view of the CESTAT ruling, the matter was set to rest at least under the Service tax regime. However, the controversy raised its head once again under the GST regime.

Position of law under GST regime:

Under the GST regime, the services provided by a director of a body corporate to the said body corporate was covered under reverse charge provisions vide Notification No. 13/2017-Central Tax (Rate), dated 28/06/2017. An examination of entry under GST provisions and under Service tax provisions reveals that the position of law under both regimes is the same.

Entry under GST regime –

Sl. No.	Category of Supply of Services	Supplier of service	Recipient of Service
(1)	(2)	(3)	(4)
6	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.

Entry under Service tax regime –

Sl.No	Description of a service	Percentage of service tax payable by the person providing service	Percentage of service tax payable by any person liable for paying service tax other than the service provider
(1)	(2)	(3)	(4)
5A	in respect of services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate	Nil	100%

The position of law being the same under both the regimes indicates that the CESTAT ruling in the case of Allied Blenders and Distillers Pvt. Ltd. is relevant under GST law as well. However, under GST regime, various advance rulings were issued from time to time on the subject of GST on director’s remuneration. We examine the three relevant advance rulings in this regard –

Authority for Advance Ruling, Karnataka – Alcon Consulting Engineers (India) Pvt. Ltd. [AR No.  KAR ADRG  83/2019]

• The applicant, Alcon Consulting Engineers (India) Pvt. Ltd. sought advance ruling on the following two questions –

a) Whether the expenses incurred by the Staff members on behalf of the Company exceeding ₹ 5000-00 a day and then reimbursed periodically are liable to tax

b) Whether RCM is applicable on remuneration paid to the Directors.

• In response to the question of reimbursement to staff members, the AAR held that such reimbursement was not liable to GST, because such payment was covered under Schedule III of the CGST Act, 2017, being services rendered by an employee to the employer in the course of employment.

• So far as the second question is concerned, we wish to point out that the question asked was whether RCM is applicable on director’s remuneration. It should be noted that the question was not whether services rendered by directors to the company are liable to GST in the first place, but whether the said services were liable to GST under Reverse charge provisions. Thus, the question, in a manner of speaking assumed (or accepted) that the director’s remuneration was already liable to GST and the advance ruling was only sought on whether the said services were covered under RCM. Needless to state, the AAR restricted itself to the question posed before it and ruled that the remuneration paid to directors was covered under RCM and GST was payable on the same. The AAR responded in paragraph 5 of the ruling as under –

“5.1 The question before us is not whether this service is taxable or not, but whether this supply of services is liable to tax under reverse charge mechanism.

5.2 Notification No. 13 / 2017 – Central Tax (Rate) dated 28.06.2017 states that “on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services”. The notification is issued under Section 9(3) of the CGST Act, 2017. Entry 6 of the said Notification reads as under:

SI.No.	Category of Supply of Services	Supplier of Service	Recipient
1	2	3	4
6	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

In the present case, 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 Central Goods and Services Tax Act, 2017.”

Thus, the AAR held that director’s remuneration was covered under RCM provisions. The AAR did not make any comment on whether director’s remuneration was liable to GST in the first place, because that question was not posed before it. Further, the AAR also observed that the director is not an employee of the company. However, such observation was without any supporting argument or reasoning.

Authority for Advance Ruling, Rajasthan – Clay Craft India Private Limited [RAJ/AAR/2019‐20/33]

• The applicant   sought ruling from AAR, Rajasthan on the following two questions–

(a) Whether GST is payable under Reverse Charge Mechanism (RCM) the salary paid to Director of the company who is paid salary as per contract.

(b) Whether the situation would change from (a) above if the Director also is a part time Director in other company also.

• The AAR once again observed that the director was not an employee of the company, hence the services of a director were not covered under Schedule III of the CGST Act, 2017. In support of such observation, the AAR merely stated that the case laws [we interpret this to include definitions of director under other laws, including the Companies Act] is not relevant for the purpose of determining taxability of director’s services under GST laws.

• In conclusion, the AAR held the salary paid to a director to be covered under RCM provisions under GST.

Thus, the Rajasthan AAR also followed the same thought process as the Karnataka AAR and held the services of a director taxable.

Authority for Advance Ruling, Karnataka – Anil Kumar Agrawal [AR No.  KAR ADRG  30/2020]

• In a surprise turnaround in case of Anil Kumar Agrawal, the Karnataka AAR, in response to the question whether director’s remuneration was taxable or exempt under GST, the AAR in paragraph 7.8 observed,

“7.8 Salary received as Director from a Private Limited Company : The applicant is in receipt of certain amount termed as salary as Director of a private limited company. Two possibilities may arise with regard to the instant issue of amount received by the applicant. The first possibility that the applicant is the employee of the said company (Executive Director), in which case the services of the applicant as an employee to the employer are neither treated as supply of goods nor as supply of services, in terms of Schedule III of CGST Act 2017.

The second possibility that the applicant is the nominated director (non Executive Director) of the company and provides the services to the said company. In this case the remuneration paid by the company is exigible to GST in the hands of the company under reverse charge mechanism under section 9(3) of the CGST Act 2017, in the hands of the company, under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017.

In the instant case the applicant has not furnished any documentary evidence such as copy of agreement between the applicant and the said private company, copy of appointment order, details of ESI, PF deductions etc., so as to decide whether the applicant is in receipt of salary as an employee or as an independent director. Thus in the absence of any documentary evidence, it is not possible to decide whether the amount received by the applicant is towards his services as an Executive Director or a Non-Executive Director.

In view of the above, the remuneration received by the applicant as Executive Director is not includable in the aggregate turnover, as it is the value of the services supplied by the applicant being an employee. Further if the applicant receives the remuneration as a Non-Executive Director, such remuneration is liable to tax under reverse charge mechanism under section 9 (3) of the CGST Act 2017, in the hands of the company, under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017. Thus, the value of the said services of the applicant being a Non-Executive Director are includable in the aggregate turnover, as it is the value of the taxable services supplied by the applicant, though the tax is discharged by the private limited company, under reverse charge mechanism.”

• The AAR observed, and quite rightly, that the services rendered in the capacity of an executive director are to be considered as services rendered by an employee to the employer in the course of employment, hence, not liable to GST in view of Scehdule III of the CGST Act, 2017.

• The AAR further observed that in case of a non-executive director, the relationship of employer-employee did not exist, therefore, the same was covered under RCM provisions, exigible to GST.

To summarize, the position of various AAR on the matter of GST on director’s remuneration is as under –

Applicant	State	Outcome
Alcon Consulting Engineers	AAR Karnataka	Directors remuneration was held liable to GST under RCM provisions
Clay Craft India	AAR Rajasthan	Directors remuneration was held liable to GST under RCM provisions.
Anil Kumar Agrawal	AAR Karnataka	Remuneration of executive director was held to be salary in view of employer-employee relationship, hence not liable to GST
Allied Blenders and Distillers Pvt. Ltd. Versus Commissioner of Central Excise & Service Tax, Aurangabad	CESTAT WZB Mumbai	CESTAT found that employer -employee relationship existed between the whole time director and the Company, hence not liable to Service tax.

Upon examination of all the above judicial pronouncements, it appears that the Mumbai CESTAT ruling in case of Allied Blenders and Distillers Pvt. Ltd. remains relevant under GST law as well. Further, the principle of the said Mumbai CESTAT ruling also echoes in the AAR issued in case of Anil Kumar Agrawal (Karnataka AAR) and for reasons mentioned in the said ruling and the said AAR, the salary paid to executive, whole time directors will continue to be covered under Schedule III of the CGST act, 2017, thereby remaining outside the GST ambit.

We trust the above is of help to the reader in clarifying the legal position of reverse charge liability on services rendered by directors to the company. Questions or comments of readers on this article are welcome.

Dipen Lathi,
Chartered Accountant
www.Lathico.com

DISCLAIMER : No assurance is given that the revenue authorities/ appellate authorities/ courts would concur with the views expressed herein. Our views are based on the existing provisions of law and our interpretation thereof. We do not assume responsibility to update the views consequent upon such changes, if any. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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