Remuneration paid by companies of the Central Goods and Services Tax (CGST) Act, 2017

Contents  hide 

1 Whether the remuneration paid by companies to their directors falls under the ambit of entry in Schedule III of the Central Goods and Services Tax (CGST) Act, 2017

1.1 Companies Act

1.2 WTDs

2 Conclusion

3 Reference

3.1 Related

Whether the remuneration paid by companies to their directors falls under the ambit of entry in Schedule III of the Central Goods and Services Tax (CGST) Act, 2017

Schedule III to CGST Act, 2017 deals with activities or transactions which shall be treated neither

as a supply of goods nor a supply of services. This mainly deals with the services by an employee to the employer in the course of or

in relation to his employment. The issue of remuneration to the directors has been examined under two different categories: 

1. Liability of GST on remuneration paid by the companies to the independent directors (IDs) defined in terms of Section 149(6) of the Companies Act, 2013 OR those directors who are not the employees of the said Company (Non-Executive Directors(“NEDs”) and;
2. liability of GST on remuneration paid by companies to the whole time directors(WTDs) including the Managing Director (MDs)who are employees of the said company.

This implies that if directors are to be considered as employees of the company, then the work carried out by the directors in their course of employment can neither be considered as supply of services nor goods and, therefore, GST cannot be levied on the same. However, if we consider that the directors are not the employees of the company, then the services provided by them would be considered to be “supply of services” under section 7 of the CGST Act and, thus, GST will be levied on the companies for the services

provided to the company by the directors through the means of reverse charge mechanism. Reverse charge is defined under section 2(98) of the CGST Act. It implies that the liability to pay taxes is on the recipient of the supply of goods or

services instead of the supplier of such goods or services.

Companies Act

The Companies Act, 2013 classifies directors as executive directors or whole-time directors on the one hand and non-executive directors or

independent directors on the other. A ‘whole-time director’ under section 2(94) of the Companies Act, 2013 is a person who may or may not be an employee of the company” However, section 149(6) of the Companies Act[1] makes it clear that independent directors are not the employees of the company.

Central Board of Indirect Taxes and Customs (CBIC) vide a circular dated 10^th June 2020 sought to clarify this ambiguity and explain the implication of GST on the remuneration paid to be given to the directors – both ‘whole-time directors’ as well as ‘independent directors’. The Circular says that, for the levy of GST on the independent directors, such

directors should neither be treated as employees nor as proprietors or partners of the company

according to section 149(6) of the Companies Act, 2013 read with rule 12 of the Companies (Share Capital and Debentures) Rules,

2014. Therefore, independent directors are not included within the definition of an ‘employee’, and as a result, the services

provided to the company

by such directors would not fall within

Schedule III of the CGST Act and would instead qualify as “supply of service. This service will thus be taxable

under GST in the form of a reverse charge in the hands of the company.

WTDs

In regards to WTDs, the circular clarifies that these directors may or may not be the employees of the company according to section 2(94) of the Companies Act read with rule 12 of Companies (Share Capital and Debentures) Rules, 2014. Therefore, in such cases, it is pertinent to look into the activities or the services provided by such directors to the company. Thus, the remuneration received by such directors can either be treated as ‘salaries’  and

be subjected to tax deduction at source (TDS) under section 192 of the Income Tax Act or it can be treated as fees for professional or

technical services in the company’s account and be subject to TDS under Section 194J of the IT Act.

The circular further clarified that the salary subjected to TDS under section 192 of the IT Act shall be considered to be considered received towards services by an employee to the employer in either the course of or in relation to his employment’ as per schedule III of the CGST Act and hence shall not be taxable under the CGST [2]Act.  However, the income subject to TDS under section 194J of the IT Act shall be treat as the consideration for providing services, which are not include

within the ambit of Schedule III of the CGST Act and

is therefore taxable under the CGST Act.

Conclusion

The clarification on the subject of remuneration of directors has failed to address in the case of whole-time directors. The clarification has not given a strict view on the status of the whole time director

as an employee of the company. The clarification has certainly brought closure to the issue of taxation of remuneration of independent directors

but did not clarify the position with respect to whole-time directors. Companies will be require to look at the terms of contract/employment of whole-time

directors to ascertain their tax liability under CGST Act.

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Reference

[1]The Companies Act, 2013 s.  2(94) &149(6)

the CGST Act ,.2017 s.7 &2(98)

[2]circular dated 10^th June, 2020 issued by Central Board of Indirect Taxes and Customs (CBIC)

(Share Capital and Debentures) Rules, 2014rule 12

The Income Tax Act.1961 section 192&194J