GST Implications on Director’s Remuneration

Every company pays remuneration to its directors and records it as an expense in the books of accounts. From a GST perspective, the question arises whether GST would be applicable on the remuneration paid by the company to its directors. If GST is applicable on such remuneration, then the next question is whether the tax would be payable under forward charge by the director, or whether such amount is taxable under reverse charge and the tax is to be paid by the company. Let's discuss the above issues in detail.

According to the CGST Act 2017, GST is applicable on the supply of goods or services or both. However, Schedule III of the act contains a list of activities or transactions that are neither treated as a supply of goods nor a supply of services. As per paragraph 1 of Schedule III, the services provided by an employee to the employer in the course of or in relation to his employment would not be considered as a supply. Therefore, if there exists an employer-employee relationship, then as per paragraph 1 of Schedule III of the CGST Act 2017, such a transaction would not be considered a supply of service.

The next question that comes to mind is 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. If the director is providing services in the capacity of an employee, then GST would not be applicable on such transactions by virtue of Schedule III. To bring more clarity on this matter, the CBIC issued Circular Number 140/10/2020 dated 10.06.2020.

The para-4 & 5 of said circular is reads as follows;

“4.1 The primary issue to be decided is whether or not a “Director” is an employee of the company. In this regard, from the perusal of the relevant provisions of the Companies Act, 2013, it can be inferred that:
a. 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.
b. the definition of “independent director” 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.

4.2 Therefore, in respect of such directors who are not the employees of the said company, the services provided by them to the company, in lieu of remuneration as the consideration for the said services, are clearly outside the scope of Schedule III of the CGST Act and are therefore taxable. In terms of entry at Sl. No. 6 of the Table annexed to Notification No. 13/2017 Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.

4.3 Accordingly, it is hereby clarified that the remuneration paid to such independent directors, or those directors, by whatever name called, who are not employees of the said company, is taxable in hands of the company, on reverse charge basis.

5.1 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.

5.2 It is also pertinent to note that similar identification (to that in Para 5.1 above) and treatment of the Director’s remuneration is also present 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 ('IT Act'). However, in cases 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.

5.3. Accordingly, it is clarified that the part of Director’s remuneration which are declared as salaries in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.

5.4 It is further clarified that the part of employee Director’s remuneration which is declared separately other than salaries in the Company’s accounts and subjected to TDS under Section 194J of the IT 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. Further, in terms of notification No. 13/2017 Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the company, is liable to discharge the applicable GST on it on reverse charge basis”.

In the above para of said circular, it is clarified that if a company has deducted TDS on remuneration paid to directors under section 192 of the Income Tax Act 1961, then such remuneration would be considered as the salary paid to the director in lieu of an employer-employee relationship. Accordingly, it would neither be treated as a supply of goods nor a supply of services, and GST would not be applicable on such remuneration.

However, if the company has deducted TDS under section 194J of the Income Tax Act (i.e., TDS on professional services), then it would not be considered as remuneration in lieu of the employer-employee relationship. Hence, it would not be covered under Schedule III of the CGST Act 2017 and GST would be applicable on such a transaction under RCM. The question here arises, whether all services provided by the director would be covered under RCM payable by the company? Here it is important to note that GST on reverse charge basis if attracted will only be in cases where services are provided by such directors in the capacity as director and not in any other capacity (Individual capacity). The same was also clarified by CBIC vide Circular No. 201/13/2023, the para-2 of said circular is laid down as follows;

“Whether services supplied by director of a company in his personal capacity such as renting of immovable property to the company or body corporate are subject to Reverse Charge mechanism

2. Reference has been received requesting for clarification whether services supplied by a director of a company or body corporate in personal or private capacity, such as renting of immovable property to the company, are taxable under Reverse Charge Mechanism (RCM) or not

2.1 Entry No. 6 of notification No. 13/2017 CTR dated 28.06.2017 provides that tax on services supplied by director of a company or a body corporate to the said company or the body corporate shall be paid by the company or the body corporate under Reverse Charge Mechanism.

2.2 It is hereby clarified that services supplied by a director of a company or body corporate to the company or body corporate in his private or personal capacity such as services supplied by way of renting of immovable property to the company or body corporate 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”.

Accordingly, from the above circular it is clear that RCM would be applicable on those services supplied by director, which are supplied by him in the capacity of director of that company and the services supplied by a director to the company in his private or personal capacity like services supplied by way of renting of immovable property to the company are not taxable 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.