In order to decide the issue of GST on Director Remuneration the primary issue which the CBIC has to decide is whether or not a ‘Director’ is an employee of the company. In this regard, after perusal of the relevant provisions of Companies Act, 2013 it can be inferred that:
As per section 2(94) of the Companies Act, 2013, the whole-time director may be a person who is not an employee of the company. Further, As per 149(6) of the Co’s Act, 2013 an Independent director should not have been an employee of the 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, the CBIC has examined the issue of remuneration to directors under following two categories:
- (A) Leviability of GST on remuneration paid by companies to the independent directors or those directors who are not the employee of the said company
Services provided by these Directors 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 the hands of company under Reverse Charge. (Refer entry at Sl. No. 6 of the Table annexed to notification No. 13/2017-Central Tax (Rate) dated 28.06.2017).
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.
- (B) Leviability of GST on remuneration paid by companies to the directors who are also an employee of said company
Various courts while deliberating on the issue of employer-employee relationship held that, a Director who has 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.
Similarly, under the Income Tax Act, salaries paid to the directors are subject to TDS u/s 192 of the Income Tax Act, 1961, whereas, in other cases, where the remuneration is in the nature of professional fees, the same is liable for deduction u/s 194J of the Act.
Therefore, CBIC has clarified that,
- – Director’s remuneration which is declared as ‘Salaries’ in the bools of accounts of the company and subjected to TDS u/s 192 of the Income Tax Act, 1961 will not be taxable under GST being consideration for service under employment.
- – Whereas, remuneration for other services of these directors which is declared separately other than salaries and TDS is deducted u/s 194J of the Act shall be considered as outside the scope of Schedule III of the CGST Act and are therefore taxable in the hands of company under Reverse Charge.