Applicability of RCM on Director Remuneration

[Chitresh Gupta]

Background

As serial no. 6 of Notification No. 13 / 2017 - Central Tax (Rate) dated 28.06.2017, services supplied by a Director of a company or a body corporate to the said company or the body corporate is liable to tax under reverse charge. Thus, the company or a body corporate located in the taxable territory, being recipient of service is liable to pay tax under reverse charge.

In the above background, it pertinent to note that there can be various services which can be provided by the Director to the company and for which the payment is made by company. Some of the examples are;

1. Services as a director/employee for which director remuneration is paid
2. Renting of immovable property
3. Commission on certain transaction
4. Sitting fee
5. Independent Professional/advisory fee

Now, the question arises whether the above services provided by the director would be treated as supply and consequently the payment made by company would be liable to tax under reverse charge?

Judicial Precedence

Recently, in Re: M/s. Alcon Consulting Engineers (India) Pvt. Ltd. [2019 (10) TMI 793 - AUTHORITY FOR ADVANCE RULING, KARNATAKA] - Authority for Advance Ruling, Karnataka observed and held that the remuneration to the Directors paid by the applicant are not covered under clause (1) of the Schedule III to the CGST Act, 2017, as the Director is not the employee of the Company. The consideration paid to the Director is in relation to the services provided by the Director to the Company and the recipient of such service is the Company as per clause (93) of section 2 of the CGST Act and the supplier of such service is the Director.

Since the applicant is the company and is located in the taxable territory and the Directors’ remuneration is paid for the services supplied by the Director to the applicant company and hence the same is liable to tax under reverse charge basis under section 9(3) of the CGST Act, 2017.

Further, again in the case of In Re : M/s Clay Craft India Private Limited [2020 (4) TMI 228 - AUTHORITY FOR ADVANCE RULING RAJASTHAN], the advance ruling authority for Rajasthan uphold the above view.

However, in both these advance rulings, a very important question that has not been considered and deliberated by Authority is ‘whether the director of a company is employee or not’? The ruling simply states that since the services are provided by director to the company, these shall be covered under section 9(3) [reverse charge] and the company is liable to pay tax on the same.

‘Employee’

As the services provided by an employee to the employer in the course of or in relation to his employment are not treated as ‘supply’ as per Schedule III to CGST Act, 2017.  It is important to understand the term ‘employee’.

The term ‘employee; has not been defined under the GST Law. However, there are various labour law legislations which define the term ‘employee’ like Factory Act, Employee Provident Fund Act, Employees Estate Insurance Act etc. The definition of employee as provided in these Acts may not be applicable in the GST Law as given with reference to the particular Act. Generally, in order to have a employer and employee relationship, the employer shall exercise absolute and effective control over the employee, not only the sufficient control. The several factors which may be considered for determining the relationship of employer and employee can be:

• who is the appointing authority;
• who is the paymaster;
• who can dismiss;
• how long alternative service lasts;
• the extent of control and supervision;
• the nature of the job e.g. whether it is professional or skilled work;
• nature of establishment;
• the right to reject.

Many of these factors shall be applied together in order to determine employer and employee relationship. The employer and employee relationship has been analyzed by the courts at various occasions.

Erstwhile Service Tax Regime

The similar entry was also covered under reverse charge under service tax regime. The CBIC (the CBEC) vide Letter No. F. No 354/127/2012-TRU dated 27-07-2012 in para 7 clarified as follows in this regard:

7. Services of a director on the board of a company have now become taxable.  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.  Thus, in the case of Govt. nominees, the services shall be deemed to be provided by the Govt. 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.

Thus, basis above, since the service provided by director in his personal capacity, the director remuneration paid by company should not be liable to tax under reverse charge. It would be treated as part of employment contract. No company under service tax regime paid tax under reverse charge on director remuneration while similar entry was there in erstwhile regime also.

Further, CBIC (then CBEC) issued Circular No. 115/09/2009 – ST dated 31-07-2009, whereby it was clarified in para 3 that remunerations paid to Managing Director / Directors of companies whether whole-time or independent when being compensated for their performance as Managing Director/Directors would not be liable to service tax.

Income Tax Law

Under Income Tax Law, the director remuneration is also taxed as income under the head salaries by treating the relationship between director and company as that of employee and employer. The company also deducts the applicable TDS u/s 192 of the Income Tax Act under the head salaries and issues Form-16 to the director. This never questioned by the Income Tax Department.

Implications

For the sake of simplicity, if we assume that all the services provided by directors to company are covered under GST and liable to tax under reverse charge then the following consequences would be as follows:

• Director remuneration paid to directors shall be liable to tax @ 18% under reverse charge u/s 9(3).  Thus, All the companies, irrespective of level of activity or the aggregate turnover, shall have to take registration compulsory u/s 24(iii).
• The other payments made to directors like rent, sitting fee, professional fee etc. would be taxed under reverse charge. Further, these is no doubt about the taxability of these payments under reverse charge.

Conclusion

The view upheld by Hon’ble Advance Ruling Authority in M/s. Alcon Consulting Engineers (India) Pvt. Ltd. [2019 (10) TMI 793 - AUTHORITY FOR ADVANCE RULING, KARNATAKA] and In Re : M/s Clay Craft India Private Limited [2020 (4) TMI 228 - AUTHORITY FOR ADVANCE RULING RAJASTHAN] seem to be flawed as they have ignored the fact that the directors can also work in the capacity of the employees of the company and the remuneration in respect of such services may be governed by clause 1 of Schedule III to Sec 7 of CGST Act.

Further in cases where directors provide service in capacity other than employee like acting as a consultant or charging rent for the office space etc., are already within the scope of supply and GST is levied on the same accordingly.

The above interpretation may have serious implication on the corporate sector especially the MSME sector which are currently not within GST as they are below the threshold turnover. It is recommended that the suitable clarification shall be issued by the CBIC in order to resolve the issue urgently and avoid the unnecessary litigation.

In case of any  further discussion, do contact the Undersigned.

Regards;

CA Chitresh Gupta & CA Shilpi Gupta

Email : Chitresh.gupta@gstexperts.net, shilpi.gupta@gstexperts.net

Contact Nos: 09910367918, 09910009056,  0120-4318026 Website: www.gstexperts.net

Dated: 08-04-2020

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