GST on Director's Remuneration - Detailed Analysis | RCM | Vivek Agarwal FCA, CS, LLB
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GST on Director's Remuneration:
Contents of the article
1. Analysis of the topic as per GST, Company Law etc.
2. Rajasthan AAR
3. Karnataka AAR
4. Conclusion
Entry No. 1 of Schedule III to the CGST Act covers ‘services by an employee to the employer in the course or in relation to his employment.
Thus, the services provided by an employee to the employer in the course of or in relation to employment is outside the scope of supply.
Further Notification No. 13/2017 – Central Tax (Rate) stated that “on categories of supplies mentioned therein, the whole of Central Tax payable under section 9 of the CGST Act shall be paid on reverse charge basis by the recipient of the services”. Entry No. 6 of the said Notification reads as under:
SL. No.
Category of Supply of Services
Supplier of Services
Recipient of Services
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
The Notification merely specifies the person who is liable to pay the tax. It is a well accepted position that the levy of tax cannot be created vide a Notification issued for prescribing the person liable to pay tax.
The supply of service by the Director has to first qualify as a ‘supply’ under Section 7 of the CGST Act. Only then, the services of Directors can be held to be liable to tax under RCM.
Important criteria to consider in this regard are:
Types of directors - executive directors or non-executive directors
The package offered to directors
The documentation maintained in this regard like offer letter, Letter of Intent, employment agreement, TDS deducted , ESI, PF etc.
Issues:
whether director is an employee of the company?
.......
rom the provision in Section 2(9) it is clear that it includes any person employed for wages in or in connection with work of the establishment to which the Act applies and also includes any person employed by or through immediate employer on the premises of the establishment or under the principal employer or his agent of work which is ordinarily a part of the work of establishment or which is preliminary to work carried on in or incidental to the purpose of the establishment.
ESI Corporation vs Venus Alloy Pvt.:
Hon’ble Supreme Court has held that if Director of a Company receives remuneration for discharge of any duty then the Director will come under the definition of "employee" u/s 2(9) of the ESI Act 1948.
Now the question arises whether, all services provided by an employee to the employer outside the scope of supply?
No. Only services that are provided by the employee to the employer in the course of employment are outside the scope of supply. Services provided outside the scope of employment for a consideration would be a service.
Example: Employee of company A provides his services on contract basis to an associate Company B of the employer. This would be considered in the scope of supply.
Would services provided by a person to another on contract basis be treated as services in the course of employment?
No. Services provided on contract basis is considered to be provided on principal-to-principal basis. Thus, these are not included as services provided in the course of employment.
Explanation to Section 62(1)(b) of the Companies Act, 2013
It defines employee to include ‘a director of the company, whether a whole-time director or not but excluding an independent director’
As per section 2(94) of the Companies Act, 2013, “whole-time director includes a director in the whole-time employment of the company”.
The definition of 'whole-time director' is an inclusive one. A whole time director refers to a director who has been in employment of the company on a fulltime basis and is also entitled to receive remuneration. It is evident from this definition that a director is an employee of Company. Thus, the remuneration paid to director is in the nature of salary.
Rule 2(k) of Companies (Specification of definitions details) Rules, 2014 - “Executive Director” means a whole time director as defined in clause (94) of section 2 of the Act
In common trade parlance, Managing Director or Whole Time Director are treated as Employee of the company. They are offered all the benefits as are available to other employees like PF, ESI etc. Companies deduct TDS for remuneration paid to director under Section 192 of Income Tax Act.
Moreover, director discloses remuneration received from companies under income from salaries head while filing his return of income.
Rajasthan AAR: M/s Clay Craft India Pvt. Ltd
Karnataka AAR in the case of M/s Anil Kumar Agarwal :
There could be two possibilities in the said matter
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