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TAXABILITY OF DIRECTOR'S SERVICES |
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TAXABILITY OF DIRECTOR'S SERVICES |
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With Service Tax regime migrating to negative list approach w.e.f. July 1, 2012, almost all the services except those in negative list (section 66D) and exempted services (Notification No. 25 2012-ST dated 20.06.2012) have become exigible to service tax . Thus, services rendered by company directors in the capacity of director have also become taxable w.e.f. 1.7.2012 and are now liable to Service Tax. The remuneration they get for attending board meetings shall be subjected to Service Tax. However, Central Board of Excise and Customs has recently amended the provisions of reverse charge under section 68(2) read with Rule 2(i)(d) (EE) of Service Tax Rules so as to provide that Service Tax on Services rendered by the directors shall be payable by the companies under the reverse charge mechanism. Here are few frequently asked questions (FAQs) to clear certain doubts and confusions in relation to taxability of director's services and liability to pay Service Tax on such services. 1. Who is a director? According to section 2(13) of the Companies Act, 1956, 'director' includes any person accepting the position of the director, by whatever name called, i.e., he should be a member of the Board of Directors of the company. If he is not a board member but designated as director in any functional capacity, he is not a director of company under section 2(13). 2. What is the relationship between a company and its directors? Although a company is a legal entity, it cannot act by itself but can do so only through its Directors, thus establishing a relationship of principal and agent. Moreover, Directors are in fiduciary position vis-à-vis the company and, to that extent, they are also deemed to be trustees of the properties and assets of the company 3. Whose services are liable to Service Tax-directors or board of directors? Under the Companies Act, 1956, all the powers vested in directors are exercisable by them only collectively. As an individual director, no director has the power to act on behalf of the company unless such powers have been delegated to him by the Board. 4. Whether Board of Directors can be asked to pay Service Tax as an Association of Persons (AOP) ? No. Though technically individual directors are collectively called as board of directors, the board exercises its power u/s 291 and 292 of the Companies Act, 1956. The board is responsible to shareholders. Individually directors provide services to the company but are collectively responsible as a board under the Companies Act to the company / its shareholders. The scheme of Service Tax stipulate levying of tax on directors on the services rendered by them to the company in their individual capacity. The company also compensates to the individual board members and not to the board as a single unit. The board of directors cannot be asked to pay Service Tax as a body of individuals or association of persons. 5. What type of directors are covered for the purpose of Service Tax? A company director can be of any of the following types or called by the following names –
The directors (generally whole time / managing / executive directors) who are under contractual employment with the company and receive salary or remuneration from the company will not be covered as they shall be considered as employees of the company. All such directors who are not in employment with the company shall be considered as providing services to the company which shall attract Service Tax. 6. Why are the services of whole-time directors not covered under Service Tax? Section 65B(44) defines 'service' which means any activity for consideration carried out by a person for another but excludes a service provided by an employee to an employer in the course of employment. In case of whole-time directors, it is a contractual employment and is governed by the provisions of the Companies Act, 1956 which also require Government's approval in certain cases. As such, they fall outside the scope of section 65B(44) of the Finance Act, 1994 (as amended). 7. Whether the services of director who attends and participates in the board meeting by any means shall be liable to Service Tax? Yes, why not. The mode of rendering the service does not govern the scope of Service Tax. The services rendered by director by any means shall be liable for Service Tax. It could be –
8. Are all directors employees of a company? No. All directors are not employees of the company, but where they are in service or employment of the company, they will be treated as an employee. If a director is also in employment of the company, he would be certainly an employee and entitled to claim the rights given to employees as such but his rights relating to directorship are distinct and separate. 9. Whether a designated partner of a limited liability partnership (LLP) will be considered as a director for the purpose of Service Tax? No. Though as per the LLP Act, 2006, LLP is considered as a body corporate, for the purpose of Service Tax, LLP shall be considered as a firm only in terms of Rule 2(1) (cd) of Service Tax Rules which defines partnership firm to include a LLP. In Income Tax also, LLPs are assessed as firms. 10. Whether whole-time directors are covered under negative list or any exemption under Notification No. 25/2012-ST. Whole-time directors are neither covered under negative list nor are included in mega exemption notification. Their services are not covered in the scope of 'service' itself by virtue of specific exclusion in the definition of service u/s 65B(44) of the Finance Act, 1994 (service provided by employee to employer). 11. Whether Service Tax will be applicable on services provided by directors / governing body members / members of non-corporate entities? Such services may also be liable to levy of Service Tax. Examples could be director of a scientific institution or director of a hospital, director of institutes like IIM, AIIMS, IITs or trustee of a trust. In such cases, directors or trustees will be liable to pay Service Tax and Service Tax will not be payable under reverse charge as reverse charge applies to ‘company’ only. taxmanagementindia.com 12. What type of charges shall be liable to Service Tax? Since all the services provided by directors in their capacity of a directors shall be covered under scope of Service Tax, the gross charges payable to them by the company shall be liable to Service Tax. It may be in the form of any one or more of the following – § sitting fee § commission § bonus § share in profit § benefit in form of ESOPs etc. 13. Whether sitting fee paid to directors for attending board meetings only are taxable or any amount paid as fees whether for board meetings or committee meetings will be taxable? All amounts paid as remuneration except salary to directors shall be liable to Service Tax, whether for attending board meetings or committee meetings or for any other service rendered in the capacity of a director. If an employed director gets sitting fee for attending the meeting, it may be liable to Service Tax as Department is likely to view it that way. There is need for clarification on this issue. 14. What amounts received by directors from the company will not attract Service Tax? The following amounts received by the directors from the company will not attract Service Tax as such amounts does not represent service provided by directors- i) interest on loan by director to company ii) dividend on shares iii) other professional charges on account of services not rendered as a director (in professional capacity) 15. Whether reimbursement of expenses incurred by the director by liable to Service Tax? Perhaps No. Directors are considered to be agent of the company and as such expenses are reimbursed to them as an agent. Moreover, taxability shall be subject to the valuation rules and criteria of 'pure agency' shall have to be satisfied. 16. Who is liable to pay Service Tax in case of services provided by directors? Service Tax is payable under reverse charge by the companies who receive services from their directors who are not in employment in terms of Rule 2(i)(d) (EE) of Service Tax Rules and Entry No. 5A of Notification No. 30/2012-ST dated 20.06.2012 (as amended by Notification No. 45 and 46/2012-ST dated 7.8.2012) 17. Whether reverse charge will be applicable even when director is a non-individual? Only individuals can become directors as per section 253 of the Companies Act, 1956, No body corporate, association or firm shall be appointed director of a company and only an individual shall be so appointed. However, individuals can be nominees of any company, association or any other entity including Government. 18. Who is liable to pay Service Tax in respect of services rendered by a foreign director? Like in case of any Indian director, the services of any foreign director are also liable to Service Tax which shall be discharged by the company itself under reverse charge mechanism. 19. If any Indian is a director of a foreign company and attends a meeting abroad, what will be tax liability? In case where any Indian person is a director of a foreign company and meeting is held outside India, in such case, there will be no Service Tax liability as place of provision of service shall be in non-taxable territory, besides service recipient being located outside taxable territory. Place of Provision of Services Rules, 2012 shall have to be kept in mind. 20. Who is liable to pay Service Tax in case of a nominee director nominated by any other agency / company in representational capacity? A director may be appointed either in an individual capacity or to represent an entity (including government) who has either invested in the company or is otherwise authorized to nominate a director. When a director receives payment in his personal capacity, the same is liable to be taxed in the hands of the director. However, where the fee is charged by the entity appointing the director and is paid to such entity, the services shall be deemed to be supplied by such an entity and not by the individual director. 21. Who has to pay Service Tax in case of a Government nominee director? In the case of Government nominees, the services shall be deemed to be provided by the Government and liable to be taxed under the exclusion sub- (iv) of clause (a) of section 66D of the Finance Act, 1994 i.e. support services by Government to business. Such services are liable to be taxed on reverse charge basis. 22. What percentage of Service Tax is payable under reverse charge by the company? Entire amount (100 percent) of Service Tax shall be payable by the company under reverse charge mechanism. 23. What will be the taxability of director's services between July 1, 2012 and 6 August 2012? During the period from 1.7.2012 to 6.8.2012 (both days inclusive), the liability to pay Service Tax has to be discharged by the concerned director himself and not by the company. However, he / she shall be eligible for threshold exemption of Rs. 10 lakh in terms of Notification No. 33 / 2012-ST dated 20.06.2012.. 24. For the relevant period of July – August 2012, whether directors should obtain Service Tax registration. Yes, if their services are exigible to Service Tax, they should obtain Service Tax registration which is a preconditions for payment of Service Tax. 25. Whether the companies required to pay service tax on director’s services should obtain service tax registration, if not already registered? Yes. Companies shall have to register themselves under service tax before making payment of service tax on services provided by directors under reverse charge mechanism. 26. Should directors raise a bill for the services rendered? Ideally yes. Any service provider providing taxable services should raise a bill, invoice or challan. However, in case of directors, a practical way could be that company itself prepares and get the invoice signed by the concerned director while making payment in ordinary course. This will ensure compliance as well as facilitate allow-ability Cenvat Credit, if any. However, Service Tax payment challan shall also be a valid document for claiming Cenvat credit. 27. Whether payment to directors shall be considered as input service and Cenvat credit claimed? Yes. Services rendered by the directors to the company should be considered as input services and Service Tax paid by the company should be eligible for Cenvat credit subject to Cenvat Credit Rules, 2004. 28. Since there is a monetary limit on payment of remuneration to directors beyond which it requires approval of the Central Government u/s 309 or 310 of the Companies Act, 1956, whether Service Tax paid by the company under reverse charge shall be deemed to be a part of such remuneration? Under the scheme of Service Tax, though taxable services are rendered by the directors, the burden of payment of Service Tax has been shifted on the companies on whose board, such directors serve. In certain cases which are already at the top of the ceiling, payment of Service Tax by company will result in exceeding the monetary limit of 1 percent or 3 percent of net profit, as the case may be. Ministry of Corporate Affairs (MCA) has vide General Circular No. 24/2012 dated 9.8.2012 clarified that for the financial year 2012-13, any increase in remuneration solely as a result of application of Service Tax on commission shall not require Central Government's approval (though deemed to be a part of remuneration as per Income Tax) u/s 309 or 310 of the Companies Act, 1956.. It may be noted that this relaxation is only for the financial year 2012-13 and only applies to non-whole time director's remuneration. = = = = = = =
By: Dr. Sanjiv Agarwal - August 25, 2012
Discussions to this article
Sir, A Company has operations in both under Excisable products (manufacturing activity) and non-excisable products. In such can we split the Service Tax amount on Directors Commission between the above two operations based on >>> say >>> Turnover and avail CENVAT credit benefit for the part of its operation. Whether this will hold good as per CCR 2004
I am afraid, we can not split the director's fees as suggested. There is no such provision in Companies Act also to this effect. Going by the same analogy, do we split the audit fee or MD's remuneration ?
Sanjiv Agarwal
For taking cenvat on director's input service, maintain separate accounts as determined under Rule Rule 6(3A)(b)(iii) in respect of input services of Cenvat Credit Rules as inserted w.e.f. 1-4-2011.(On proportionate basis based on ratio of previous year).
Respected Sir, Nice compilation and analysis on the aforesaid matter. Best Regards, Pradeep Khatri
Thanks. Critical inputs solicited
ARTICLE IS NICE.THANKS FOR THE CLEAR IDEA POINT NO 14 YOU HAVE DISCUSSED ABOUT SERVICE NOT INCLUDED IN DIRECTORS SERVICE. WHERE IT IS WRITTEN THAT INTEREST ON LOAN IS EXCLUDED?? CAN YOU GUIDE ME SOME BOOKS FOR REFERRING THIS MATTER?
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