GST ON DIRECTOR’S REMUNERATION – FUSION OF GST LAW AND COMPANY LAW

[Dr. Sanjiv Agarwal]

There has been a lot of confusion on taxability of director’s remuneration from companies in which they are directors in different forms. The confusion or doubts got mounted in the wake of recent conflicting advance rulings. (Not discussed in this article).

CBIC has now come out with a detailed Circular No. 140/10/2020-GST dated 10.06.2020 which clarifies issues relating to taxability of director’s remuneration including salary.

This Circular examines following two situations in relation to directors remuneration:

1. leviability of GST on remuneration paid by companies to the independent directors defined in terms of section 149(6) of the Companies Act, 2013 or those directors who are not the employees of the said company.

2. leviability of GST on remuneration paid by companies to the whole-time directors including managing director who are employees of the said company. 

Position of Directors under Companies Act, 2013

The companies need to understand the difference between kind of directors. In the board, all directors are equal but for taxation under GST, one needs to understand whether the director is employee of the company or otherwise.

Who is a director:

A director is a member of the board of directors in a company or any organization. The Companies Act, 2013 defines the following in relation to director(s):

Section	Relating to
2(10)	Defines board of directors
2(34)	Defines director
2(47)	Defines independent director
2(54)	Defines managing director
2(94)	Defines whole time director
149(6)	Appointment of independent director
196	Appointment of managing / whole time directors
197	Remuneration of managing / whole time directors
Schedule IV	Role, functions, duties and appointment of independent directors
Schedule V	Conditions for appointment of managing director / whole time director and their remuneration

Limited companies all over the world are managed by a collective wisdom comprised in board of directors. Board in relation to a company means the collective body of directors of the company and a director means a person appointed as director to the Board of a company. Under section 149 of the Companies Act, 2013, every company shall have a board of directors.

Directors can be of many types in terms of nomenclature, role, functions and duties. But all the directors are jointly and severally liable as a board of directors. They have collective responsibility as a board except whole-time directors who have a major role to play. Directors could be known as executive directors, non-executive directors, whole-time directors / managing director, independent directors, nominee directors, alternate directors, promoter directors etc.

Broadly, from remuneration perspective, directors could be classified under two categories–one, those who are in employment with the company as whole-time directors, by whatever name called and receive compensation in the form of salary; Secondly, non-executive or part-time directors who are not in employment of company and do not receive salary. These are remunerated by way of sitting fee and other payments but not salary.

Nominee director means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests.

An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director. There are certain conditions stipulated for being called an independent director in section 149(6).

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. He substantially manages the company and the may be called by different names. Further, whole-time director includes a director who is in whole-time employment of a company. The definition of whole-time director is an inclusive definition. Thus, managing director may also be a whole-time director. Also, there may be other directors who are not managing director (s) but are whole-time directors.

Managing director is appointed in terms of section 196 of the Companies Act, 2013. Subject to the provisions of section 197 and Schedule V, a managing director, whole-time director or manager shall be appointed and the terms and conditions of such appointment and remuneration payable be approved by the Board of Directors at a meeting which shall be subject to approval by a resolution at the next general meeting of the company and by the Central Government in case such appointment is at variance to the conditions specified in that Schedule.

Section 197 regulates the remuneration of directors. A director may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever, as may be decided by the Board.

A director may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other.

The total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director in respect of any financial year shall not exceed eleven percent of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

Confusion over applicability of GST on Director’s Remuneration

The reason for confusion is on treatment of ‘directors’ services whether as a employee or otherwise. Companies Act provides a clue on how to treat a director, viz,

• the definition of a whole time-director under section 2(94) of the Companies Act, 2013 is an inclusive definition, and thus he may be a person who is not an employee of the company.

• the definition of “independent directors’ under section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it amply clear that such director should not have been an employee or proprietor or a partner of the said company, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.

Once, it has been ascertained whether a director, irrespective of name and designation, is an employee, it would be pertinent to examine whether all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service”) or is there any element of “contract for service”. The issue has been deliberated by various courts and it has been held that a director who has also taken an employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other on the basis of the contractual relationship of master and servant with the company, i.e. under a contract of service (employment) entered into with the company.

CBIC Clarification (Circular No. 140/GST dated 10.06.2020)

The following points are worth noting :

• Managing director / whole-time directors / executive directors are employees of company if they get salary and allowances from such company.
• Independent / non-executive / nominee directors are not employees of company and as such don’t get salary but are remunerated in other forms such as sitting fees, commission etc.
• Both types of directors can not be equated for the purpose of GST.
• In terms of section 7 read alongwith Schedule III of CGST Act, 2017, services by employee to employer in the course of or in relating to his employment are excluded. As such, services by such directors who are considered as employees are not a supply and hence not taxable. There is no question of levy of GST on such services and as such reverse charge also does not apply.
• One acid test for such cases can be that TDS is deducted u/s 192 of the Income Tax Act, 1961 (i.e. salary).
• In case of directors other than whole time directors (i.e., independent, non-executive, nominee etc.), since they are not in whole time employment, they do not earn salary but get rewarded in some other form which could be sitting fees, bonus, commission, percentage of net profit etc.

• In case of such non-whole time directors, they are not ‘employees’ or in whole time employment by any interpretation and hence their services does not fall under exclusion vide Schedule III of CGST Act.

• Being taxable, such services of directors shall be subject to levy of GST but in such cases, Notification No. 13/2017-CT (Rate) dated 28.06.2017 comes into play which provides for discharge of GST liability under reverse charge mechanism i.e., by the company.

• Such director’s remuneration is also subject to TDS but under section 194J of the Income Tax Act, 1961 (i.e., professional services)
• For other services rendered by whole-time directors which are otherwise taxable, GST shall be levied and discharged under reverse charge mechanism.         

Based on clarification, the following position emerges :

GST on Director’s Remuneration
Whole time Directors (Employee)	Non-executive / Independent Directors
As employee, not a taxable supply to company	As director, taxable supply to company
GST - Not taxable	GST - Taxable and payable under reverse charge
Non-employee services -  taxable and payable under reverse charge	Non-director services - Taxable and payable under reverse charge
TDS under section 192 of Income Tax Act, 1961	TDS under section 194(J) of Income Tax Act, 1961

Confusion on Reverse Charge

Though the CBIC Circular clarifies that services provided by whole-time directors to the company which are not in the capacity as an employee shall be out side the scope of exclusion and be taxable, such GST shall be payable under reverse charge mechanism by the company. This would imply that all services provided by ‘employee directors’ to company which are not in the course of employment will the subject to levy of GST and tax be discharged by the company under reverse charge.

On this issue, there could be conflicting interpretation as what is taxable is supply per se and not the person who is supplying. For example, if a director provides services of renting a property, tax on such service is under renting of immovable property and not as director’s services. Confusion still persists as to whether ‘any’ or ‘all’ services provided by directors are under reverse charge or only the services provided in the capacity as a director.

End Note

It would be advisable for companies to document the transaction between directors as employee and director as non-executive director elaborately so that no dispute arises and the tax payers are saved from harassment.