The Recent Advance Ruling Authority of Rajasthan in the case of Clay Crafts India Pvt. Limited decided that remuneration paid to director attracts GST under reverse charge mechanism “RCM”, this ruling again created confusion between the stakeholders, this articles aims at giving an insight on this topic.
“AAR” ON GST ON DIRECTOR REMUNERATION
Recently the Rajasthan Authority for Advance Ruling in the case of – M/s. Clay Craft India Private Limited. – AR NO. RAJ/AAR/2019-20/33 Dt:-20/02/2020
Some Brief fact of the ruling:-
- The applicant is a private limited company engaged in the manufacturing of crockery items.
- The Company have six directors and directors were paid regularly salary and deduct TDS u/s 192 of the Income Tax Act.
- The Company is deducting employee provident fund from directors’ salary and all other policies and benefits to them are given as per policy decided by the company from their employees.
- The directors filed their Income Tax Return and declared remuneration under salary head.
Ruling / Decision of “AAR”:-
- Consideration paid to the Director is against the supply of service provided by them to the applicant company and are not cover under clause (1) of the schedule- III of the CGST Act, 2017 as the director are not the employee of the Company.
Hence GST is payable on remuneration paid to Directors under RCM as it is cover under entry no-6 of Notification No. 13/2017 Central Tax (Rate) dated 28.06.2017 issued under section 9(3) of the CGST Act, 2017.
To download complete ruling please click here Clay Craft Ruling
Earlier The Karnataka Authority for Advance Ruling in the case of M/s Alcon Consulting Engineers (India) Pvt Ltd – AR No. KAR ADRG 83/2019 dated 25.09.2019- crux of the case – It held that the remuneration paid to the directors is subject to GST under reverse charge and is covered under entry 6 of the notification 13/2017-Central Tax dated 28-06-2017.
To download complete ruling click here Alcon Ruling
For better understanding first we have to understand the different types of director, designation and their category of appointments.
Broadly there are 2 types of director – executive directors and non- executive directors.
EXECUTIVE DIRECTORS:- As per Rule 2(1)(k) of the Companies (Specification of definitions details) Rules, 2014 “Executive Director” means a Whole Time Director as defined in clause (94) of section 2 of the Act”.
Whole Time Director “WTD”: As per Clause 2(94) of Companies Act, 2013 “whole-time director” includes a Director in the whole-time employment of the company.
By virtue of this it is clear that services given by the whole time director be treated as in the course employment.
Managing Director: As per Clause 2(54) of Companies Act, 2013 “managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.
By virtue of this it is clear that services given by the managing director be treated as in the course of employment.
Pointer –
1. A “WTD” and “Managing Director” is always executive director of the Company.
2. As the executive director is a director who has power to execute on behalf of the company and involved in day to day affairs of the company, it is as same as the description given in the definition of “WTD” under clause 2(94) of the Companies Act, 2013, hence any services performed by the executive director will also be treated as in the course of employment.
NON- EXECUTIVE DIRECTORS: – Non- Executive director has not been defined under Companies Act, but we can interpret as director other than executive director. They are not involved in the day to day working of the company. They are not in the employment of the company; it includes independent directors, nominee directors etc.
Pointer – Non -Executive Director is treated as other than executive director, any services given by the non- executive director will not be treated as in the course of employment.
INDEPENDENT DIRECTOR – As per Section 149 (6) of the Companies Act, 2013, means a director other than Managing Director, Whole Time Director or Nominee Director. Who, in the opinion of the board, is a person of integrity and possesses relevant expertise and experience. Who is or was not a promoter of the Company or its holding, subsidiary or associate company, who is not related to promoters or director of the Company ——.
Pointer– Always be treated as Non – Executive Director and any services performed by the independent director will be treated as in the capacity of service.
For better understanding some brief fact about applicability of GST, meaning of supply, service and RCM
APPLICABILITY OF GST
The Levy of GST is on Supply of all Goods or Services or both or combination of both except on the supply of alcoholic liquor for human consumption.
WHAT IS SUPPLY
Section -7 “Supply” includes all forms of supply of goods and/or services or both and includes agreeing to supply when they are for a consideration and in the course or furtherance of business. It specifically includes sale, transfer, barter, exchange, license, rental disposal etc.
WHAT IS SERVICE
The Constitution (101 Amendment) Act, 2016 inserted in clause 366(26A) the definition of “services” to mean anything other than goods.
Section 2(102) of the CGST Act defines “Services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
Analysis – The term “anything” includes in the definition of service wider the scope of service and it cover everything except specifically excluded from the definition i.e. goods, money and securities.
Now from GST point of view to check the applicability of GST on services portion these point also to be considered – “It should be fulfilled the other criteria of supply also i.e. Consideration and in the course or furtherance of business”.
EXCLUSION FROM THE MEANING OF SUPPLY AS PER GST ACT (NEGATIVE LIST) –
As per Schedule-III of the CGST Act, 2017 certain activities will be neither a supply of goods, nor a supply of services, the following activities shall not be considered as “Supply” for GST:-
Entry No- 1 of the schedule –III states that – “Services by an employee to an employer in the course or in relation to his employment”.
Thereby excluding the services performed by the employee in the course of his employment out of the scope of GST and no GST attract on this.
REVERSE CHARGE MACHANISM UNDER GST LAW – “RCM”
In Simple word reverse charge means liabilities to pay GST is on recipient instead of provider/ service. Under GST Regime Section 9 (3) & 9 (4) of the CGST Act & Section 5 (3) & 5 (4) of IGST Act deals with the provision of reverse charge.
Section- 9 (3) of the CGST Act, 2017 The Government on the recommendation of the council, may by notification, specify categories of supply of goods or services or both, the GST on which shall be paid on reverse charge basis by recipient of supply.
Position under GST Law on taxability of services provided by Director –
Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017 provides for GST to be paid on RCM by the recipient of such services. This notification was issued under Section 9(3) of the CGST Act, 2017. Entry 6 of the said Notification reads as under-
| Sl. No. | Name of service | Provider of service | Recipient of service |
| 6 | Services supplied by a director of a company or a body corporate to the said company or the body corporate. | A director of a company or a body corporate | A company or a body corporate located in the taxable territory |
MEANING AND APPLICABILITY OF “AAR”
Meaning – “Advance ruling” means a decision provided by the Authority or the Appellate Authority to an applicant on matters or on questions specified in sub-section (2) of section 97 or subsection (1) of section 100 of the CGST Act, 2017, in relation to the supply of goods or services or both being undertaken or proposed to be undertaken by the applicant.
Applicability – The AAR & AAAR will be applicable only within the jurisdiction of the concerned state or union territory. An advance ruling pronounced by AAR or AAAR shall be binding only on the:-
- Applicant
- On the concerned officer or the jurisdictional officer in respect of the applicant.
This clearly means that an advance ruling is not applicable to similarly place other taxable persons in the State. It is only limited to the person who has applied for an advance ruling.
PRACTICAL APPROACH TO BE TAKEN
- Do “Due Diligence” of the Company and verify the designation/ category of director that he is “executive director” or “non-executive director” of the company.
- Verify the contract/ agreement entered with Directors and check the terms and conditions of his employment/ appointment.
CONCLUSION:-
- Based on the aforesaid discussion, Services provided by executive directorwill be treated as in the course of employment and services provided by non-executive director will be treated as in the course of other than employment.
- Based on the aforesaid discussion, any remuneration paid to executive director will fall under entry no-1 of schedule-III of CGST Act 2017 and exemptfrom GST under RCM and remuneration paid to non – executive director will be liable for GST under RCM entry no-6 of Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017.
- Any fees payable to executive director other than remuneration (i.e. sitting fee, commission, payment in terms of professional or technical services etc.) are for GST under RCM entry no-6 of Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017.
- An advance ruling is applicable only toapplicant who sought the “AAR” and on the concerned officer or the jurisdictional officer in respect of the applicant. Hence the above AAR of Rajasthan Authority and Karnataka Authority are not applicable as a whole.
- As per my view – Ruling/Decision of Rajasthan AAR are factually incorrect, as they considered that services provided by director to his company are in the nature of service only, the ruling ignore the definition of WTD/ Executive director as per Companies Act, 2013 which clearly say that WTD/Executive Director are in the employment of the company and also ignore the fact that as per entry no-1 of schedule-III of CSGT Act, 2017 “Services by an employee to an employer in the course or in relation to his employment”are not treated as supply and are exempt from GST.
I hope this analysis may be helpful in determining the liability of GST.
Thank You.
CA Vikas Aggarwal
+91-8800549233
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