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GST on Director’s Remuneration
/ GST under RCM on fees or remuneration paid to Director
By Yogesh Verma
(CS/LLB) / 2
min read / GST Case Law
Introduction:
A company is an artificial person established under the Companies Act,
possessing a distinct legal existence. The company cannot operate or function
without human intervention. Although shareholders are the true owners, they do
not typically handle the daily management of the company. Directors, therefore,
step in to manage the company's affairs, make crucial decisions, and oversee
financial approvals.
Under GST, services provided by a director to a company or
body corporate are subject to the reverse charge mechanism (RCM). This rule
prompts several questions:
- Does
the reverse charge apply to all services provided by directors?
- Are
directors considered employees of the company, and if so, does their
service fall under Schedule III (which lists services not considered as
supply under GST)?
This article explores these issues in detail.
Director as an Employee: Who
Qualifies?
The term "employee" is not specifically defined
under GST law. Generally, an employee is defined as someone employed for wages
or salary, particularly at a non-executive level. Establishing the relationship
between an employer and an employee involves key indicators such as hiring and
firing authority, regular salary payments, and other perquisites.
The case of independent directors is distinct. Independent
directors, not involved in managing the company's daily affairs, are typically
not considered employee directors. However, whole-time directors, managing
directors, and executive directors are generally full-time employees.
Clarification by Circular No.
140/10/2020-GST (Dated 10 June 2020)
The circular clarifies that a whole-time director may or may
not be an employee of the company. The definition of a "whole-time
director" under Section 2(94) of the Companies Act, 2013, includes those
employed full-time by the company. Thus, if a director is employed full-time,
any services provided by them are covered under Schedule III of the CGST
Act and therefore not subject to GST.
Executive vs. Non-Executive
Directors: Key Differences
While the Companies Act does not classify directors
explicitly, companies often categorize directors as either executive or non-executive
directors:
- Executive
Directors: Involved in the day-to-day management
and decision-making of the company, such as whole-time directors and
managing directors. These individuals are full-time employees of the
company, earning remuneration in the form of salaries.
- Non-Executive
Directors: These directors do not participate
in the daily operations of the company. Typically, independent or
part-time directors, they earn remuneration in the form of fees or
commissions, rather than salaries.
Application of Reverse Charge
Mechanism (RCM)
One of the significant ambiguities is whether all
services provided by directors are subject to RCM or only those rendered in
their capacity as directors. According to Notification No. 13/2017 – CT
(Rate), services supplied by a director to the company are subject to RCM.
The notification, however, does not specify the particular services covered
under this mechanism.
Clarification by Circular No.
201/13/2023-GST (Dated 1 August 2023)
The CBIC has further clarified that services provided by a
director in their private and personal capacity, such as renting
immovable property to the company, are not taxable under RCM. This
clarification helps to draw a distinction between professional services
provided by a director and personal transactions with the company, with only
the former being subject to reverse charge.
GST Applicability on Directors'
Services: Summary
1.
Whole-Time/Executive
Directors: Whole-time directors employed full-time
by the company are treated as employees, and services provided by them fall
under Schedule III and are not subject to GST.
2.
Non-Executive
Directors: Directors not involved in the
daily management (like independent directors) are not considered employees. The
services provided by them are taxable under RCM.
3.
Services
Rendered in Private Capacity:
Any service provided by a director outside their official role, such as renting
property, is not subject to RCM.
Conclusion
The GST treatment of services provided by directors hinges
on their employment status and the nature of services provided. Whole-time
directors, being full-time employees, fall outside the scope of GST under
Schedule III. However, non-executive directors and services provided in their
professional capacity are taxable under the reverse charge mechanism.
Understanding these distinctions is critical for companies
to ensure proper GST compliance, particularly in scenarios involving varying
services from directors. Recent clarifications by CBIC have provided
much-needed clarity, helping companies navigate the GST landscape in relation
to directors' services.
Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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