No GST under RCM on salary to executive directors – Karnataka AAR

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In a recent Rajasthan AAR it was stated that any kind of consideration paid to directors would be considered as director remuneration and would be charged to GST under RCM. Many people were worried after that AAR as no difference was shown in treatment between executive and non executive director.

In the current AAR by Karnataka state Dt. 04.05.2020 there were various issues which were dealt with which are as follows:

a) Partner’s salary as partner from my partnership firm,
b) Salary as director from Private Limited company
c) Interest income on partners fixed capital credited to partner’s capital account
d) Interest income on partners variable capital credited to partner’s capital account
e) Interest received on loan given,
f) Interest received on advance given
g) Interest accumulated along with deposit/ fixed deposit
h) Interest income received on deposit/ fixed deposit
i) Interest received on Debentures
j) Interest accumulated on debentures
k) Interest on Post office deposits
l) Interest income on National Savings certificate (NSCs)
m) Interest income credited on PF account
n) Accumulated Interest (along with principal) received on closure of PF account.
o) Interest income on PPF
p) Interest income on National Pension Scheme (NPS)
q) Receipt of maturity proceeds of life insurance policies
r) Dividend on shares
s) Rent on Commercial Property
t) Residential Rent
u) Capital gain /loss on sale of shares

In the present AAR, assessee was of the belief that the Income received towards any kind of salary is outside the purview of GST and not be included in the aggregate turnover of individual for GST purpose.

In this regard, AAR stated that there could be two possibilities i.e. first applicant could be employee of the said company i.e. executive director or he could be a non executive director of the company and provide his services to the company.

In the first case service of applicant as employee to the employer are neither treated as supply of goods nor supply of services as same would fall under Schedule III of CGST Act. In the second case remuneration paid by company would be liable to reverse charge under GST by virtue of Notification no. 13/2017 Central Tax (Rate), Dt. 28.06.2017.

To read the full order CLICK HERE.

Thus, this is a more balanced view and most people would relate to this view as compared to the view taken by Rajasthan AAR as there the concept of executive and non executive director was not even considered and it was treating all directors in similar fashion.

Even though this judgement’s are not final and as we know AAR is only applicable to the case of assessee who has sought, however it gives us a sense about the thought process of department as one state GST department thinks all directors are equal and one thinks in a opposite way. Many a times we even see two High courts giving different decision on similar issue and therefore one should follow the High court of their state or if there is a more favorable judgement to assessee one can follow that.

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