The levy of Goods and Service Tax (i.e., GST) on the director’s remuneration has been a subject matter of dispute. Additionally, some of the recent advance rulings on the subject have acted like fuel to the fire.
The Central Board of Indirect Taxes and Customs, vide circular no. 140/10/2020 – GST dated 10th June 2020 tried to clarify all the uncertainty prevailing on levy of GST on the director’s remuneration. The present article covers the clarification as provided by the Board.
Understanding the essential terms
Before going through the clarification, we need to understand the terms like ‘independent director’, ‘whole-time director’, and part of Schedule III of the Central Goods and Service Tax Act. For understanding the terms, reference needs to be made to the Companies Act.
‘Independent director’
Reading together both section 149(6) of the Companies Act and rule 12 of the Companies (Share Capital and Debentures) Rules, the independent director is the director who is not employee or proprietor or partner of the company during any of the preceding three financial years in which the director is proposed to be appointed in the said company.
‘Whole-time director’
Section 2(94) of the Companies Act defines the term ‘whole-time director’. The definition is inclusive and covers the director, who is not an employee of the company.
Schedule III of the Central Goods and Service Tax Act
Schedule III covers the activities which shall not be treated as a supply of goods or a supply of service, and accordingly, GST will not be applicable on the same. It is pertinent to note that services provided by an employee to the employer during the course of or in relation to his employment are covered under the said schedule III.
Remuneration paid to ‘Independent directors’ and ‘whole-time directors’
Going through both the definition of ‘independent directors’ and ‘whole-time directors’ in nut-shell, it can be concluded that such directors are a person who is not an employee of the company.
Since the directors are not employees of the company, the same is outside the scope of Schedule III of the Central Goods and Service Tax. Accordingly, any remuneration paid to ‘independent directors’ or ‘whole-time directors’ or directors who are not an employee of the company is taxable under GST.
Now, let us evaluate the applicability of the reverse charge mechanism. Sr. No. 6 of notification no. 13/2017-Central Tax (Rate) dated 28th June 2017 makes the recipient of service liable to pay GST if the director supplies the services to the company. Thus, in the present case, the company would be liable to pay GST on remuneration paid to the ‘independent directors’ or ‘whole-time directors’ or directors who are not employee of the company.
Remuneration paid to directors being an employee of the company
Following two situations emerges, when the director has taken employment in the company-
- As director of the company, wherein the remuneration is treated as professional fees and not salary. Accordingly, TDS is deducted under section 194J of the Income Tax Act; and
- Another based on the contractual relationship of master and servant i.e., under a contract of service entered between the company and the director. Accordingly, TDS is deducted under section 192 of the Income Tax Act.
Taxability of GST and applicability of reverse charge on both the above situation is tabulated hereunder-
| Particulars | Taxability of GST | Applicability of reverse charge |
| Remuneration treated as professional fees | GST is applicable since the activity is outside the scope of Schedule III. | The company is liable to discharge GST under reverse charge (in terms of sr. no. 6 of notification no. 13/2017- Central Tax (Rate) dated 28th June 2017. |
| Remuneration treated as salary | GST is not applicable since the activity is covered within the scope of Schedule III. | Not applicable. |
Synopsis of the clarification
The gist of the entire circular is tabulated hereunder
| Type of directors | Taxability under GST | Applicability of reverse charge |
| Independent director or whole-time director or director who is not an employee of the company. | Taxable | Reverse charge applicable. Accordingly, the company is liable to discharge the applicable GST. |
| Director is in the employment of the company. And the director’s remuneration is stated as salary in the books of account of the company. TDS deductible under section 192. | Not taxable | Not applicable. |
| Director is in the employment of the company. And the director’s remuneration is stated as other than salary in the books of account of the company. TDS deductible under section 194J. | Taxable | Reverse charge applicable. Accordingly, the company is liable to discharge the applicable GST. |