Previously, in various Advance ruling we had seen that directors salary was made liable to GST considering it as remuneration paid to director for service and company was asked to pay GST on same under RCM.
There was no distinction made between executive and non-executive director which created a lot of questions in the mind of assessee and now finally CBIC vide circular 140/10/2020 has clarified that GST in case of director who are employees shall not be liable to GST.
CBIC has examined the issue of remuneration to directors 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.
In respect of independent directors or those directors who are not the employee 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.
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.
Further, 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.
Company has to pay GST on same under reverse charge.
To read full circular CLICK HERE.
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