Levy of GST on the Director’s Remuneration

The levy of Goods and Service Tax (i.e., GST) on director’s remuneration has been a contentious issue, with recent advance rulings intensifying the debate. To address this, the Central Board of Indirect Taxes and Customs issued a clarifying circular on 10th June 2020. This article provides a comprehensive overview of the clarified position.

Understanding the Essential Terms

Before exploring the clarification, it's vital to understand terms such as ‘independent director’, ‘whole-time director’, and Schedule III of the Central Goods and Service Tax Act. Referencing the Companies Act is necessary to comprehend these terms.

‘Independent Director’

According to section 149(6) of the Companies Act and rule 12 of the Companies (Share Capital and Debentures) Rules, an independent director is someone who has not been an employee, proprietor, or partner of the company in the preceding three financial years.

‘Whole-time Director’

Defined under section 2(94) of the Companies Act, the term ‘whole-time director’ inclusively describes a director not serving as an employee of the company.

Schedule III of the Central Goods and Service Tax Act

Under Schedule III, certain activities are not considered as supplies of goods or services, excluding them from GST applicability. Notably, services provided by an employee to an employer during employment fall under this schedule.

Remuneration Paid to ‘Independent Directors’ and ‘Whole-time Directors’

Both ‘independent directors’ and ‘whole-time directors’ are generally not employees, placing their remuneration outside Schedule III. Thus, remuneration given to these directors is taxable under GST. Concerning the reverse charge mechanism, as per notification no. 13/2017-Central Tax (Rate) dated 28th June 2017, the company must pay GST for services provided by these directors.

Remuneration Paid to Directors who are Company Employees

There are two scenarios for company-employed directors:

Where remuneration is treated as professional fees, TDS is deducted under section 194J of the Income Tax Act; and
Where a contract of service applies, TDS is deducted under section 192 of the Income Tax Act.

The GST taxability and reverse charge applicability are as follows:

Particulars	Taxability of GST	Applicability of Reverse Charge
Remuneration treated as professional fees	GST is applicable; activity is outside Schedule III.	Reverse charge applies. The company pays GST.
Remuneration treated as salary	GST is not applicable; activity is covered by Schedule III.	Not applicable.

Synopsis of the Clarification

The summarized circular is outlined below:

Type of Directors	Taxability under GST	Applicability of Reverse Charge
Independent director or whole-time director or director not an employee	Taxable	Reverse charge applicable. The company discharges GST.
Director is an employee, and remuneration is noted as salary (TDS under section 192)	Not taxable	Not applicable.
Director is an employee, and remuneration is not considered salary (TDS under section 194J)	Taxable	Reverse charge applicable. The company pays GST.

Understanding the implications of GST on directors' remuneration ensures compliance with tax obligations. For additional assistance with professional tax registration, it is advised to consult tax professionals or relevant authorities.

Back to Learn

Frequently Asked Questions

Common questions about Levy of GST on Directors Remuneration.

The rationale is that independent directors and whole-time directors are not considered employees of the company. Since their services are outside the scope of Schedule III of the Central Goods and Services Tax Act, the remuneration paid to them is subject to GST.

The recipient of the service, which is the company, is liable to pay GST on the remuneration paid to independent directors or whole-time directors. This is based on the reverse charge mechanism specified in Sr. No. 6 of Notification No. 13/2017-Central Tax (Rate).

No, GST is not applicable on the remuneration paid to directors who are employees of the company and the remuneration is treated as salary. This is because such services are covered under Schedule III of the Central Goods and Services Tax Act, which exempts services provided by an employee to the employer from GST.

If a director is an employee of the company, but the remuneration is treated as professional fees and not salary, then such remuneration is subject to GST. Furthermore, the company is liable to pay GST on such remuneration under the reverse charge mechanism.

The Companies Act provides the definitions for independent directors and whole-time directors. An independent director is one who is not an employee or proprietor or partner of the company during the preceding three financial years. A whole-time director includes a director who is not an employee of the company.

Schedule III of the Central Goods and Services Tax Act lists activities that shall not be treated as a supply of goods or services, and hence, are not subject to GST. One of the activities covered under Schedule III is services provided by an employee to the employer during the course of or in relation to employment.

Based on the circular issued by the Central Board of Indirect Taxes and Customs, there are no exceptions mentioned regarding the applicability of GST on remuneration paid to independent directors or whole-time directors who are not employees of the company.

The treatment of director's remuneration under the Income Tax Act, whether as salary (TDS under Section 192) or professional fees (TDS under Section 194J), serves as a guiding factor in determining the GST treatment of such remuneration.

The circular provides a comprehensive clarification on the GST treatment of remuneration paid to different categories of directors, based on their employment status and the nature of remuneration (salary or professional fees). It aims to resolve the uncertainty and disputes surrounding this issue.

Non-compliance with the GST provisions related to director's remuneration may lead to legal consequences, such as penalties, interest, and potential disputes with tax authorities. Companies must ensure they correctly determine the GST treatment of director's remuneration and comply with the applicable GST laws and regulations.