Leviability of GST on Director's Remuneration

Last Updated On: June 11, 2020, 2:35 p.m.
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LEVIABILITY OF GST ON DIRECTOR’S REMUNERATION

 

Central Board of Indirect Taxes Vide Circular No: 140/10/2020 – GST Dated 10th June 2020 clarifies that the leviability of GST on Director’s remuneration paid by the companies to the independent Directors or those Directors who are not an employee of the company and Leviability of GST on remuneration paid by the company to the directors who are working as an employee in the company.

There is a confusion arised whether the remuneration paid by companies to their director falls in the scope of Schedule III of the Central Goods and Services Tax Act, 2017 CGST services by an employee to the employer in the course of or in relation to his employment or whether the same is liable to be taxed in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017.

The issue of Leviability of GST on Directors remuneration is categorized into two parts:

  1. As per section 149(6) of the Companies Act, 2013 Leviability of GST on Director’s remuneration paid by the companies to the independent Directors or those Directors who are not an employee of the company.
  • The provisions of the Companies Act, 2013 regards the primary issue to be decided is whether the director is or 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 Debenture) Rules, 2014 makes it 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 company.
  • In the scope of Schedule III of the CGST Act, the directors who are not the employees of the said company or the services provided by them to the Company is taxable under the above mentioned Act.
  • SL. No. 6 of the Table annexed to notification No. 13/2017–Central Tax (Rate) dated 28.06.2017, the recipient of the said service i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.
  1. Leviability of GST on remuneration paid by the company to the directors who are working as an employee in the company.
  • It is Decided to examine whether all the activities performed by the director are in the course of employer-employee relations i.e contract of service. This issue has been deliberated by various courts and it has been held that a director who has also taken employment in the company may be functioning as a director of the company and the other on the basis of the contract of service.
  • The treatment of the Director’s remuneration is also included in the Income Tax Act, 1961 wherein the salaries paid to directors are subject to Tax Deducted at Source (‘TDS’) under Section 192 of the Income Tax Act, 1961. In this case where the remuneration is in the nature of professional fees and not salary, the same is liable for deduction under Section 194J of the IT Act.
  • In the scope of Schedule III, it is clarified that the part of Director’s remuneration which is declared as Salaries in the books of a company and subjected to TDS under Section 192 of the IT Act is not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment.
  • Under Section 194J of the IT Act subject to TDS, it is clarified that the part of employee Director’s remuneration which is declared separately other than ‘salaries’ in the Company’s accounts the fees for professional or technical services shall be treated as which are outside the scope of Schedule Ill of the CGST Act.
  • No. 13/2017 –Central Tax (Rate) dated 28.06.2017 notifies that the recipient of the said service i.e. the Company, is liable to discharge the applicable GST on it on a reverse charge basis.

 Summary:

For Startups having turnover below threshold limit and paying remuneration u/s 194J. There is an additional condition to take GST registration and to pay tax under RCM 

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