Clarification in respect of levy of GST on Director’s Remuneration (Happy GST series – 26) by CA Rajender Arora
Circular No: 140/10/2020 – GST dated the 10th June, 2020 stating Clarification in respect of levy
of GST on Director’s Remuneration. This circular has cleared all the doubts regarding the
taxability of Director’s Remuneration
1. Why CBIC issued Circular on Director’s Remuneration?
Various references have been received from trade and industry seeking clarification whether the
GST is leviable on Director’s 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. Circular is mandatory or optional in nature?
Circular is mandatory to be followed by the department and optional for the taxpayer.
3. This circular is applicable w.e.f.?
This circular is clarificatory in nature so it is applicable retrospectively, i.e. 01.07.2017.
4. What is the advice for the taxpayer in adopting this circular?
This is a beneficial circular so it is suggested to be followed by the taxpayer.
5. How the taxpayer shall deal with a situation where he has done vice versa to the circular,
before issuance of this circular?
In such a case, following two scenarios are possible:-
Tax payer has paid the tax which was not due to be paid: - In such a case, taxpayer can
claim refund under Section 54 of the CGST Act, 2017
Tax payer has not paid the tax which was not due to be paid: - In such a case, taxpayer
shall pay the tax along with Interest. If taxpayer deposits the tax u/s 73(5) of the CGST
Act, 2017, no Show Cause notice shall be issued in this regard and proceeding shall be
deemed to be completed or dropped.
6. What are the types of remuneration paid to directors?
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.
7. What is the 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?
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.
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. 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.
8. What is the leviability of GST on remuneration paid by companies to the whole-time
directors including managing director who are employees of the said company?
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.
It is also pertinent to note that similar identification (to that in Para 5.1 above) and treatment of
the Director’s 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.
Accordingly, it is clarified that the part of Director’s 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.
It is further clarified that the part of employee Director’s remuneration which is declared
separately other than “salaries” in the Company’s 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.
