Director's Service- RCM applicable or not

Generally, the suppliers of goods or services are liable for the payment of tax the Government. However, in certain cases the liability to pay tax to the Government is shifted to the recipient which is called payment of tax under RCM. The concept of Reverse Charge Mechanism is very crucial concept under GST. The concept of RCM was also available in the service tax regime. In respect of the applicability of RCM on the services received from directors and consideration paid by the company to directors, there are certain ambiguities among the taxpayers. In this article we will try to resolve such ambiguities and we will get to know when RCM would be applicable on director’s services or when the directors are liable to pay tax under forward charge.

As we know that Notification No.13/2017 CT(R) contains the list of services on which RCM is applicable. The serial number 6 of Notification No.13/2017 CT(R) states that the RCM would be applicable in respect of services provided by a director to the company. The said serial number 6 is laid down as follows;

Thus from the above it is clear that in case the company receiving any service from the director, then the company is liable to pay tax under RCM.

However, as per para 1 of schedule III of CGST Act 2017 the services provided by an employee to the employer in the course of or in relation to his employment shall be neither treated as supply of goods nor supply of services.

Now in respect of the service received from the director, the question comes whether directors should be considered as employees of the company. There is no definition of the terms "employee" or "director" in the GST Laws. To determine whether a director is an employee, one should carefully analyze the terms of the contract i.e., whether it is a contract of service (employer- employee relation) or is there any element of "contract for service".

To resolve the ambiguity in this regard the CBIC has issued a Circular No 140/10/2020-GST. In para 4 of the said circular it was clarified that the remuneration paid to independent directors, or directors, by whatever name called, who are not employees of the said company, is taxable in hands of the company, on reverse charge basis.

Further, in para 5 of the said circular, it was clarified that the part of the director's remuneration which is declared as “Salaries” in the books of a company and subjected to TDS under Section 192 of the Income Tax Act, are not taxable under GST due to employer-employee relationship in terms of Schedule III of the CGST Act, 2017. The part of the director's remuneration which is declared separately "other than salaries" in the Company's accounts and subjected to TDS under Section 194J of the Income Tax Act as Fees for professional or technical services shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable under RCM.

Thus as per the Circular No.140/10/2020-GST, the test to determine whether the RCM is applicable or not is the section of income tax Act under which TDS is deducted by the company, if TDS is deducted under section 192 of income tax Act then in such case RCM is not applicable and it would form the part of employer-employee relationship, hence no GST is payable under such situation. However, if TDS is deducted under section 194J of Income Tax Act then RCM is applicable on such services.

But the said circular has not addressed the situation where TDS is deducted any section other than the section 192 & 194J of Income Tax Act 1961. For example if any director has provided renting services to the company in scuh situation since the TDS is not required to be deducted under section 192 or 194J of income tax Act 1961. Thus in such situation whether RCM is applicable or not, this was not clarified in said circular. Hence the said circular does not provide complete clarification about the applicability of RCM on the services received from the directors.

Therefore, the CBIC has also issued a Circular No. 201/13/2023-GST on 1st August, 2023. In para 2 of said circular it was clarified that the services supplied by a director of a company or body corporate to the company or body corporate in his private or personal capacity are not taxable under RCM. Only those services supplied by director of company or body corporate, which are supplied by him as or in the capacity of director of that company or body corporate shall be taxable under RCM in the hands of the company or body corporate under Notification No. 13/2017-CTR (Sl. No. 6) dated 28.06.2017.

Thus as per the Circular No. 201/13/2023, the test to determine whether the RCM is applicable or not, is to check whether such services are provided by the director in his private or personal capacity or not. In other words for providing such services to the company it is necessary for him to hold the position of director in the company or not. Hence only those services which are provided by the director in the capacity of director would be taxable under RCM.

Accordingly, the Circular No. 201/13/2023 provides better clarification in respect of RCM applicability about the director’s services received by the company. For the purpose of better understanding let’s discuss an example;

Suppose Mr. Shyam is a software engineer and also a director in a company. Mr. Shyam attends the board meetings, pass a board resolution etc. Now as per the contract with Mr. Shyam, the company pays monthly remuneration of Rs. 1,50,000/- to Mr. Shyam for such work and the company book such expenses under the head salary, in such situation no GST would be applicable due to employer employee relationship, as the services would be covered under para 1 of schedule III.

But if the company shows Rs. 1,00,000/- as a salary of Mr. Shyam and Rs. 50,000/- for sitting fees or fees for attending the board meeting. In such situation the RCM would be applicable on the sitting fee of Rs. 50,000/-and no GST would be applicable on Rs. 100000/- which is shown as salary.

If Mr. Shyam also provides the services of designing the software to the company or any other services for which it is not necessary to hold the position of director. In such situation the charges paid by the company to Mr. Shyam in respect of such type of services would also not covered under RCM as per Circular No. 201/13/2023.

Conclusion: Only those services for which it is necessary to hold the position of director and the expenses of which are not booked by the company under the head salary, would be covered under RCM. Any other services for which it is not necessary to hold the position of director are not covered under RCM.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.