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[Circular
No: 140/10/2020 GST
dated 10 June 2020]
Subject: Clarification in respect of levy
of GST on Directors remuneration.
Various
references have been received from trade
and
industry seeking clarification whether the GST is leviable on Directors remuneration paid by companies to their directors.
Doubts have been raised as to whether the remuneration paid by companies to their directors
falls under the ambit of entry in Schedule III of the Central Goods and Services Tax Act,
2017 (hereinafter referred to as the CGST Act) i.e. services by an
employee to the employer
in the course of or in relation to his
employment or whether the same are liable to be taxed in terms of
notification No. 13/2017
Central Tax (Rate) dated
28.06.2017 (entry no.6).
2.
The issue of remuneration to directors
has been examined
under following two different categories:
(i) leviability
of GST on remuneration paid by companies to the independent
directors defined in terms of
section 149(6) of the
Companies Act, 2013
or those directors who are not
the
employees of the
said
company; and
(ii) leviability of GST on
remuneration paid by companies to the whole-time directors
including managing
director
who are
employees
of the said company.
3.
In order to ensure
uniformity in
the
implementation
of the provisions of the law across the
field formations, the Board, in exercise of its powers conferred under section 168(1) of the CGST Act hereby clarifies the
issue as below:
Leviability of GST
on remuneration paid by companies to the independent directors or
those directors who are not the employee of the said company
4.1
The primary issue to be decided is whether or not a Director‟ is an employee of the company. In this regard, from the perusal of the relevant provisions of the Companies Act, 2013, it can be inferred that:
a. the definition of a whole time-director under section 2(94) of the Companies
Act, 2013 is an inclusive definition, and thus he may be a person who is not
an employee of
the company.
b. the definition
of independent directors‟ under section
149(6) of the Companies Act, 2013, read with Rule 12 of
Companies (Share Capital and Debentures) Rules, 2014 makes it amply clear that such director should not have
been an employee or proprietor or a partner of the said company, in any
of the three financial years immediately preceding the financial year in which he
is proposed to be appointed
in the said company.
4.2
Therefore, in respect
of such directors who are not the
employees of the said company, the services provided by
them to the Company, in lieu of remuneration as the consideration for the said services, are clearly outside the scope of Schedule III of the CGST Act and are therefore taxable. In terms of entry at Sl. No. 6 of the Table annexed to
notification No. 13/2017 Central Tax (Rate)
dated 28.06.2017, the recipient of the said
services i.e. the Company, is liable to
discharge the
applicable GST on it on reverse charge basis.
4.3
Accordingly, it is hereby clarified that the remuneration paid to such independent directors, or those directors, by
whatever name called, who are not employees of the said
company, is taxable
in hands of the company, on reverse charge basis.
Leviability of GST on remuneration paid by companies to
the directors, who are also an
employee of the said company
5.1
Once, it has been
ascertained
whether a director,
irrespective of name
and designation, is an employee, it would be
pertinent to examine
whether all the activities performed by
the
director are in the course of employer-employee relation
(i.e. a contract of
service) or is there any element of contract for service. The issue has been deliberated by various courts and it has been held that a director who has also taken an employment in the
company may be functioning in
dual capacities, namely, one as
a director of the company and
the other on the basis of the contractual relationship of master and servant with the company, i.e. under a contract
of service (employment) entered
into with the company.
5.2
It
is also pertinent to note that similar identification (to that in Para 5.1 above) and treatment of
the Directors remuneration is also present in the Income
Tax Act, 1961 wherein
the salaries paid to directors are subject to Tax Deducted at Source ('TDS') under Section 192 of the
Income Tax Act, 1961 ('IT Act'). However,
in cases where the remuneration is in the nature
of professional fees and not salary, the same is liable for
deduction under Section 194J
of the IT Act.
5.3.
Accordingly, it is clarified that the part of Directors remuneration which are declared
as
Salaries‟ in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or
in relation to his employment in terms of
Schedule III of the
CGST Act, 2017.
5.4
It
is further clarified that the part of employee Directors remuneration which is
declared separately other than salaries‟ in the Companys accounts and subjected to TDS
under Section 194J of
the IT Act as Fees for professional or Technical
Services shall be treated as consideration for providing services which are outside the scope of Schedule III
of the CGST Act, and
is therefore, taxable. Further, in terms of notification
No. 13/2017 Central Tax (Rate)
dated 28.06.2017, the recipient of
the said services i.e.
the Company, is liable
to discharge the applicable GST on it
on reverse charge basis.
6
It
is requested that suitable trade notices may be issued to publicize the contents
of this circular.
7.
Difficulty, if any, in the implementation
of the above instructions may please be brought to
the notice of the Board.
CBEC-20/10/05/2020 -GST