Introduction
GST on directors’ remuneration has been a contentious issue lately. The matter has been sought before various Authorities of Advance Rulings (AAR) and varied decisions have been received.
Recently, an advance ruling was provided by AAR – Rajasthan in the matter of Clay Craft India Private Limited wherein the question sought for advance ruling was upon applicability of payment of tax on RCM basis on remuneration to directors, including whole-time directors.
Applicant’s Arguments
All logical arguments were provided by the applicant stating that the director of the company is also in employment of the company. The summary of arguments provided by the applicant is as follows:
Directors file their IT returns showing the remuneration as ‘Income from salaries’.
Directors are working as employees of the company (as whole-time directors) and are being compensated by the company by way of regular salary and other allowances as per the company policy and as per their employment contract.
The company is deducting EPF from the salary of directors.
Cited definition of employees from the Companies Act, EPF Act, and ESI Act which state that a director can be an employee of the company.
Cited case law from Karnataka High Court: Regional Director, E.S.I. v. Sarathi Lines (P) Ltd. [1998] ILLJ 28.
As per GST laws, services provided by an employee to its employer in the course of employment are neither classified as goods nor as services, and therefore GST is not leviable on such services.
Ruling in Clay Craft India Private Limited
Despite the logical interpretation of the matter, AAR – Karnataka held that directors are not the employees of the company and any services rendered by the director are taxable in the hands of the company on reverse charge basis.
This ruling was made without giving any reason or logic as to why the director is not considered as an employee of the company.
Contrasting Ruling – Anil Kumar Agarwal
In another ruling, AAR – Karnataka in the matter of Anil Kumar Agarwal has given an otherwise decision.
The Authority observed that for any person who receives salary as a director of a company, there are two possibilities:
Executive Director
The applicant is the executive director of the said company and has received salary in the capacity of an employee.
In this case, the services of the director as an employee to the employer are neither treated as supply of goods nor as supply of services in GST laws.
Nominated / Non-Executive Director
The director is the nominated director / non-executive director of the company and provides the services to the said company.
In this case, the remuneration paid by the company is exigible to GST in the hands of the company under reverse charge mechanism.
The Authority held that:
The remuneration received by an executive director is not includible in the aggregate turnover, as it is the value of the services supplied by the director being an employee.
The value of the services provided by a non-executive director is includible in the aggregate turnover, as it is the value of the taxable services supplied by such director, though the tax is discharged by the company under reverse charge mechanism.
Author’s Opinion
In our opinion, the company may not pay tax on reverse charge basis on remuneration to whole-time directors who are in employment of the company. However, this may lead to future litigation and involve cost to the company.
Further, advance ruling is applicable only on the registered person who has sought for such ruling and not upon any other taxpayer. It is not binding upon other taxpayers. The ruling can be considered for reference purpose only.
Case References Supporting Director as Employee
There are several case references which state that a director of the company is also the employee of that company under the ESI Act and Income Tax Act. The references are provided herein below:
Employee’s State Insurance Corporation V. Venus Alloy Pvt. Ltd. [SC] Civil Appeal No. 1464 of 2019
M. Salgaocar And Bros. Pvt. Ltd. vs Commissioner Of Income Tax Etc [SC] 2000 (2) SCR 1169
Sishu Ranjan Dutta And Anr. vs Bhola Nath Paper House Ltd. [Calcutta HC] 1983 53 CompCas 883 Cal
Conclusion
Thus, there is a lot of ambiguity revolving around this issue as there is no concrete decision upon this vexed issue. The CBIC and GST Council should take up this matter and issue a clarificatory circular. Else, this matter will be litigated further till it reaches Hon’ble Supreme Court – the highest level of judiciary in India, where only it will be put to rest.
Disclaimer
The content of this article provides a general guidance upon the subject matter. This is the opinion of the author. Specialist advice should be sought about any specific circumstances.