GST Applicability on Remuneration paid to Directors

Companies will have to pay GST on the remuneration they dole out to directors.

GST Applicability on Remuneration paid to Directors

*(AAR - Authority for Advance Ruling)

Overview:

Clay Craft India Pvt Ltd has filed an application before the Rajasthan bench of the AAR to sought clarification on whether salaries paid to directors would attract Goods and Services Tax.

Purpose of AAR (Authority of Advance Rulings):

To provide certain aid to the taxpayers related to unerring interpretation of the legal provisions under the GST Regime.

Company’s key points:

  • The company said its directors are working as employees for which they are being compensated by way of a regular salary and other allowances.
  • The company is deducting TDS on their salary and PF laws are also applicable to their service.
  • directors are the employees of the company and are working as such besides being Director of the company.

Remarks by Authority for Advance Ruling

  • The consideration paid to the directors by the applicant company will attract GST under reverse charge mechanism.
  • Director is the supplier of services and the applicant of the company is the recipient of the services.
  • The Company is located in the taxable territory and the Director’s remuneration is paid for the services supplied by the Director to the applicant company and hence the same is liable to tax under Reverse Charge Mechanism (RCM) basis under Section 9(3) of the Rajasthan Gods and Service Tax Act, 2017.

Order by AAR:

The services rendered by the Director to the company for which consideration is paid to them in any head is liable to pay GST under RCM (Reverse Charge Mechanism).

Provisions related to RCM on services provided by director

Section 9(3) of the CGST Act, Notification No. 13/2017- Central Tax (Rate) has been issued to prescribe supply of services on which GST is payable on RCM basis. S. No. 6 of the said Notification reads as under:

Provision

Category of supply of services

Supplier of

service

Recipient of Service

 

S. No. 6 of Notification No. 13/2017- Central Tax (Rate)

Services supplied by a director of a company or a body corporate to the said

company or the body corporate.

A director of a company or a body

corporate

The company or a body corporate located in the taxable territory.

 

Services supplied by director to his employer company has been kept under RCM.

Provisions related to Services provided by employee in course of his employment:

Section 7(1) of the CGST Act, 2017provides for inclusive definition of the supply such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Section 7(2) of the CGST Act provides for activities or transactions which would be treated neither as a supply of goods nor a supply of services. Schedule III specifies such activities and includes “services by an employee to the employer in the course of or in relation to his employment” in its ambit. Therefore, such activities cannot be considered as supply so as to be leviable to GST.

Comment by Sh. Rajat Mohan AMRG & Associates Senior Partner:

“This ruling needs to be clarified by government, otherwise, lower authorities may take legally incorrect view creating havoc in the business community.”

Conclusion:

Companies will have to pay GST on the remuneration they dole out to directors.

Author View

The Question still exists:

Whether all the services provided by the director shall be covered by the RCM provisions or RCM is only restricted to the services provided by a director in the capacity of a director?

 

Link of the order copy:

http://gstcouncil.gov.in/sites/default/files/ruling-new/RAJ_AAR_33_2019-20_20.02.2020_CCIPL.pdf

 

Author can be contacted at lalitrajput537@gmail.com / +91 8802581290

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