In a recent Advance ruling by Rajasthan Authority for advance ruling it was decided that consideration paid to the directors by the applicant company will attract GST under reverse charge mechanism as it is covered under entry no. 6 of Notification 13/2017 Central Tax (rate) dated 28.06.2017 issued under section 9(3) of CGST act, 2017.
The above advance ruling was sought in case of M/s Clay Craft India Pvt. Ltd. engaged in the business of bone china crockery, other utensils and moulds & die. The assessee company had appointed 6 director who were head of different departments and were paid salary and commission with regard to same. The company used to also apply PF laws on their salary and also TDS was deducted under the section on salary income.
The assessee repeatedly stated in its submission that the directors were no different from other employees and the salary received by such directors was shown as Income from salary in the individual return of the directors and company was paying GST under reverse charge for commission paid to directors adhering to Notification 13/2017.
Since Director were paid salary and were no different from other employee, assessee was under a belief that no GST shall be charged on such salary by virtue of Schedule III which covers Transaction which are not treated as supply wherein it has been stated that: “Services by employee to employer shall be regarded as neither supply of goods nor supply of services. However, service by employer to employee shall be a taxable service, which shall be covered by Schedule I-Entry 2 read with Valuation rules. Hence, providing cafeteria, recreation, sports facilities to employees will attract GST.”
The above application for advance ruling was filed after a recent decision of Hon’ble Authority for advance ruling, Karnataka in case of M/s Alcon Consulting Engineers India (Pvt.) Ltd Bangluru wherein the ruling was as under:
“In the present case, the applicant is the company and is located in the taxable territory and the Directors’ remuneration is paid for the services supplied by the Director to the applicant company and hence the same is liable to tax under reverse charge basis under section 9(3) of the Central Goods and Service Tax, 2017.”
In it’s submission assessee provided various interpretation of court and various other laws wherein it was stated that such directors are considered as employee and there is a difference between whole time director who are receiving salary and other director’s receiving their professional fees.
In the Advance ruling assessee raised two questions:
1. Whether GST is payable under reverse charge mechanism (RCM) on the salary paid to director of the company who is paid salary as per contract.
2. Whether situation would change from above if the director also is a part time director in other company also.
Finding and judgement of Authority for Advance Ruling:
We further observe that consideration in form of salary and commission paid to the director by the company is against the services provided by them to the company and the company is the recipient of such service and directors are the supplier.
We further observe that consideration paid to the directors is against the supply of services provided by them to the applicant company and are not covered under clause (1) of the Schedule III to the CGST Act, 2017 as the directors are not the employee of the company.
Notification no. 13/2017 has given a distinct identity to the services provided by the Director and specifically included in the category of service on which GST will be payable under RCM.
Situation will remain same in relation to part time directors.
The advance ruling has taken a strict approach/ interpretation and covered all kind of director’s under notification 13/2017, whereas the intention was to cover only those director who are not whole time directors of the company and not providing their services as an employee. The same was the situation in erstwhile law i.e. service tax where no service tax was paid on consideration paid to director’s who were serving in nature of employee.
According to the above interpretation now the company would have to make separate contracts with director’s for remuneration/ commission or bonus as a director and salary as an employee.
Although an advance ruling can only be applied in the case of assessee who has sought such advance ruling but, a clarification should be issued by the department as soon as possible or else the lower authority would start sending notices for collecting GST on such services.
You can read the order HERE.
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