The recent article in the economic times reporting that the remuneration paid by the Company to its director would attract GST under reverse charge mechanism under RCM has created lot of confusion and unrest among the corporates, this article aims at giving an insight on this subject.
The levy of GST is governed by Section 9 of the Central Goods and Service Tax Act, 2017 (for brevity hereinafter referred to as ‘CGST Act’) and the respective Sate and Union Territory GST Acts on the intra-state supplies of goods and service and the Section 5 of the Integrated Goods and Service Tax Act, 2017 (for brevity hereinafter referred to as ‘IGST Act’) on inter-state supply of goods and service tax, with some exception. Section 9(1) and Section 5(1) of the said acts respectively imposes the levy on the taxable person that is the supplier of goods or services. Further section 9(3) of the CGST Act and section 5(4) of the IGST Act extends the levy on the recipient of the goods or service for specific category of goods and service as notified. Notification No. 13/2017-Central Tax (Rate), dated 28-6-2017 as amended vide sl. no. 6 makes the company or a body corporate located in the taxable territory being recipient liable for GST for the receipt of services supplied by a director of a company or a body corporate. On the face of it appears that company is liable to pay GST on the remuneration paid to director of the company, however one must make further analysis of the GST law to conclude the taxability. In this context it is very important to analyse section 9(4) extracted as under:
The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both
Form the above section the recipient takes the foot of the person liable to pay tax in relation to supply of goods or services and hence it would be relevant to look at ‘supply’. Section 7 of the CGST Act provides the definition of supply. Section 7(2)(a) ibid provides the activities or transactions specified in schedule -III would be treated neither as a supply of goods nor a supply of services. Section 7(2) is a non-obstante clause starting with “Notwithstanding” which overrides Section 7(1) and hence even if an activity or a transaction is covered under the scope of supply if the same finds place in schedule III, it would not be supply of either goods or service.
Sl. No. 1 of the Schedule III ibid treats the services by an employee to the employer in the course of or in relation to his employment neither supply of goods nor supply of services.
In this context it would be important to analyse, whether the service of director of the company to the company would be service by an employee to the employer, in which case the same cannot be a supply and hence there is no question of GST levy either in the hands of the company or in the hands of the director.
The terms employee and employer are not defined under the GST Act and hence the same must be understood in common parlance and with the aid of other laws.
Explanation to Section 62(1)(b) of the Companies Act, 2013 defines employee as under:
‘‘Employee’’ means-
(a) a permanent employee of the company who has been working in India or outside India; or
(b) a director of the company, whether a whole-time director or not but excluding an independent director; or
(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company
but does not include-
(i) an employee who is a promoter or a person belonging to the promoter group; or
(ii) a director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.
From the above definition of the Companies Act, it is very clear that the other than the independent director all other directors either whole time or otherwise is considered as employee of the company. Section 149(6) defines the independent director to mean a director other than a managing director or a whole-time director or a nominee director. So, it is ample clear that the managing director, a whole-time director and a nominee director shall be employee of the company.
In this context it is also relevant understand the decision of Customs, Excise and Service Tax Tribunal in case of Brahm Alloy Limited vs Commissioner of CGST & C. Ex., Durgapur 2019 (024) GSTL 0616 Tri.-Cal examining the applicability of service tax under reverse charge liability on director’s remuneration, which is very similar to GST. In this case the tribunal held the director remuneration was taxable considering the facts in that case, however it gave out the ratio as to when the same would not subjected service tax. The relevant portion of the judgement has been extracted as under:
In short, to establish the employer-employee relationship, the clause of hiring and firing are an essential ingredient without which it cannot be construed whether the individual is the Promoter/Director or an employee Director. The remuneration cheque has to be paid on a month to month basis along with the admissible perquisites
Now let us proceed to analyses the Advance Rulings under GST on this subject. The first ruling was by the Authority of Advance Ruling under GST, Karnataka in case of Alcon Consulting Engineers (I) Pvt. Ltd. 2019 (030) GSTL 0678 A.A.R. – GST dated 25-09-2019, where it ruled that The remuneration paid to the Director of the Applicant company is liable to tax under reverse charge mechanism under sub-section (3) of Section 9 in the hands of the Applicant company as it is covered under Entry No. 6 of Notification No. 13/2017-Central Tax (Rate), dated 28-6-2017. This ruling did not consider or examine Schedule III nor did examine the facts that if such director was appointed as employee or otherwise and hence it can be said that the ruling is short cited.
The second ruling is by the Advance Ruling Authority for GST, Rajasthan in case of Clay Crafts India Pvt. Ltd., vide advance ruling no. RAJ/AAR/2019-20/33 dated 20-02-2020 also ruled that the consideration paid by the company to its directors will attract GST under reverse change mechanism. This ruling just held that the employees are not directors without any reasoning and without considering various facts in the case as to terms of appointment of director, TDS and PF deduction etc. and this advance ruling is not a reasoned ruling.
In the opinion of the paper write both the advance ruling has erred and has missed the basic essence that the employment service is not subjected to GST whether such employment is that of a director or any other designation. Further it is also important to understand the implication of the advance ruling and its binding nature. Section 103 of the CGST Act, provides that the order advance ruling pronounced by the Authority or the Appellate Authority shall be binding only on the applicant who had sought it in respect of any matter referred to in sub-section (2) of section 97 for advance ruling and on the concerned officer or the jurisdictional officer in respect of the applicant. Tribunal in the case of Laxmi Electricals & Decorators vs Commissioner of C. Ex., Jaipur-I 2016 (041) STR 0132 Tri.-Del has categorically held the judgment of the Authority for Advance Rulings referred to by the appellant is not being analysed here because rulings of the Authority for Advance Rulings did not constitute any binding precedent at all. Thereby it shall not be binding on any other taxpayer or company who has not applicant in that advance ruling.
To conclude the companies, must look at the terms of employment of the directors, whether it is the same in all respect with that of any employee and in such case, there shall not be GST liability. In case of any deviation or in case of independent director GST would be liable in the hands of the company under reverse charge mechanism. This adverse advance ruling will not have any binding other than for the applicant in that ruling.
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