The Authority for Advance Ruling, Karnataka and Rajasthan, have recently issued their ruling on applicability of GST on remuneration paid to directors. For those interested, the relevant ruling references are –
- AAR Karnataka – Alcon Consulting Engineers (India) Pvt. Ltd. [AR No. KAR ADRG 83/2019]
- AAR Rajasthan – Clay Craft India Private Limited [RAJ/AAR/2019‐20/33]
The AAR has, in both cases held that the remuneration paid to directors is subject to GST under reverse charge, notwithstanding the fact that such remuneration is treated as salary for Income tax and employment law purposes. Much has been written on the said advance rulings and we do not intend to go in to the merits of the rulings. [Update: AAR Karnataka, in case of Anil Kumar Agrawal has given a contrary ruling stating that remuneration paid to a director where employer-employee relationship exists is covered under Schedule III of the CGST Act, 2017, hence not taxable.]
However, it is important to note that the above advance rulings pertain to a situation where remuneration in the form of salary is paid to the directors, thereby implying that an employer-employee relationship exists between the director and the company. The question we are trying to debate here is –
What would be the GST implication where employer-employee relationship does not exist between the director and the company and the director has acted in his professional capacity.
Some examples of payment to directors are:
- Salary,
- Incentives,
- Commission,
- Sitting Fees,
- Professional fees paid to director for acting in their professional capacity,
- Rent paid to director for rental of equipment or immovable property
Payments under (a), (b) and (c) above are covered under the AAR pronouncements. We are not going into the merits of the said advance rulings in this article.
Payment under (d) is squarely covered under Schedule entry 6 of Notification No. 13/2017-Central tax (Rate), dated June 28, 2017, hence GST is payable by the company under reverse charge provisions.
Now the question remains whether payments under (e) and (f) above are also covered under the reverse charge notification [Notification No.13/2017-Central Tax (Rate)]. This is not an easy one to answer because the department has not clarified on the matter. However, a reference to the old notifications under Service tax regime and analysis of other entries in the reverse charge notification may help us reach to some logical conclusion. We discuss this in the following paragraphs –
- To the best of our knowledge, there are no judicial precedents from the CESTAT or courts on services supplied by director in their professional capacity. The precedents only deal with situation where salary is paid to directors, which the CESTAT has held that salary paid to directors cannot be covered under RCM. These rulings pertain to the Service tax regime. [Readers may refer to Mumbai CESTAT ruling in the matter of M/S Allied Blenders and Distillers Pvt. Ltd. Versus Commissioner of Central Excise & Service Tax, Aurangabad]
- In the absence of such judicial precedents and in order to obtain some insight in to the legal position taken by department in past, we draw the reader’s attention to CBEC Circular 115 of 2009. Accordingly, the department had carved out a difference between services rendered by a director of the company in capacity of a director and services rendered by the said director in some other (professional) capacity. The circular states –
“Therefore, it is clarified that the amount paid to Directors (Whole-time or Independent) is not chargeable to service tax under the category ‘Management Consultancy service’. However, in case such directors provide any advice or consultancy to the company, for which they are being compensated separately, such service would become chargeable to service tax.” [This circular was issued before RCM was introduced in Service tax]
Thus, we find that there is a case for considering services rendered in professional capacity by a director to the company as a service distinct from director’s services.
- The services of a director are covered under entry 6 of the reverse charge notification. Referring to entries 7 and 8 of the same notification, we find that these pertain to-
- Services provided by an insurance agent to a person carrying on insurance business, i.e., the insurance company, where the insurance company has to pay GST under reverse charge on the Insurance Commission paid to the insurance agent, and,
- Services provided by a recovery agent to a bank or NBFC, where the Bank or NBFC has to pay GST under reverse charge on the remuneration or commission paid to the recovery agent.
Now, if an insurance agent has rented out premises to the Insurance company or if the recovery agent has rented out premises to the bank/NBFC would such rent also be covered under reverse charge?
Taking the case of professional services, if an insurance agent or a recovery agent has rendered the services as a professional consultant or say, as a real estate agent would such consulting fees or brokerage also be covered under reverse charge?
This does not seem to be the intention of statute. What is sought to be covered under entries number 7 and 8 is only the service of an insurance agent or a recovery agent in their capacity as insurance or recovery agents and not in any other capacity. To say that services rendered by them in capacities other than that of insurance agent or recover agent would also be covered under the reverse charge provisions seems illogical.
Extending the above argument to the services rendered by a director to the company in their professional capacity or services of renting provided by a director to the company cannot be covered under reverse charge provisions because these are provided in a capacity other than that of a director. It has to be noted that for services to be covered under category of ‘Professional services’ the director must be engaged in the said profession. General illustrations are where the director is a Chartered Accountant representing the company before a tax tribunal or where the director is an engineer or architect providing the services of engineering or architecture to the company.
- A contrary view is also possible, based on simple interpretation of the said entry no.6 of the reverse charge notification. The entry states –
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 |
As the entry does not specify that the services are to be supplied in the capacity of director, it can be argued that any service rendered to the company by a person who is a director, in any capacity, will be covered under the said entry.
Input Tax Credit in hands of the director:
The impact of any decision based on the above alternative arguments will be visible in the Input Tax Credit (ITC) available to the director. If the services of the director are treated as covered under reverse charge, such services will be treated as exempt services in the hands of director. Consequently, ITC reversal, as applicable, will have to be made by the director.
Recovery by the department from the company:
Taking a hypothetical situation, let us assume that Mr.ABC, Chartered Accountant, who is a director of XYZ Pvt. Ltd. has represented the company before Income Tax Appellate Tribunal. Mr.ABC raised invoice for his services and levied GST thereon under forward charge provisions and paid the same to the department in due course. Now, if the contrary view, in paragraph (d) above, is considered, the question is, can the department recover the same tax from the company on the grounds that it was covered under reverse charge provisions? We draw the reader’s attention to the following two CESTAT rulings–
- M/s. K.V. Enterprises Versus Commr. Of Central Excise, Allahabad
- M/s. Kent Chemicals Private Ltd. Versus Commissioner, CGST, Jaipur
In the above two matters, Service tax was levied by the GTA on their invoices. However, department sought to recover the same under RCM provisions from the service recipient. While the rulings pertain to Service tax regime, the position of law under GST remains the same. In the matter of M/s K.V. Enterprises, the CESTAT observed –
“5. We find that there is no dispute about the fact that the service tax deposited by the transporters with the department. As such the objection of the Revenue cannot be appreciated, as it would amount to double deposit of the same amount of service tax on the services. The said position has already been considered by the Tribunal in the cases of (1) Umasons Auto Compo Pvt.Ltd. v. CCE & C [2014 (2) TMI 100 – CESTAT Mumbai], (2) Cronimet Alloys India Ltd. v. CCE, Visakhapatnam-I [2013 (7) TMI 593 -CESTAT Bangalore] & (3) Navyug Alloys Pvt. Ltd. v. CCE & C, Vadodara-II [2008(8) TMI 100-CESTAT Ahmedabad].”
In view of the position of law, clarified by way of the above CESTAT rulings, it appears that the department cannot recover GST on the services of the director, in the present illustration.
We trust the above is of help to the reader in clarifying the legal position on services rendered by directors in their independent capacity. 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.
All rights reserved. No part of this material may be reproduced, without the prior written permission of the author. Fair use of the content is permitted provided credit is given to the author.
© Dipen Lathi
MMXX