GST on Directors’ Remuneration

Goods and Services Tax (GST)
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August 23, 2020

Meaning of Director
A director is a person who is appointed by shareholders, manages the day-to-day business affairs of the company, and performs the duties and functions of the company under the provisions of the Companies Act, 2013. In other words, a director is a person from a group of managers who leads or supervises a particular area of the company to ensure that all legal obligations are met.

What is the Directors’ remuneration?
Directors’ remuneration is a payment or compensation received by the director in respect of services provided by him/her to the company. The compensation can be received either through fees, salary, or as the right of use of the company’s property, with approval from the shareholders and board of directors. Generally, director remuneration is fixed at the time appointment of the director.

Different types of Directors
There are two types of Directors in a company namely;

Executive: They are ones who manage the day-to-day operations of the company. Executive directors are the persons who devote their whole time on the company therefore called Whole-time Directors

Non-executive: They are the ones who are professionally involved merely in the broad business of the company and do not involve in the day-to-day activities. These non-executive directors attend the board meetings and receive sitting fees or commission or any other form of consideration for providing services to the company or body corporate. Non-executive directors include Independent directors also. Independent directors are the ones who do not have any material relationship with the company and are not a related person of the company apart from receiving director remuneration.

Implications of GST on Directors’ remuneration
As per Schedule-3 of the CGST Act, 2017 Services by an employee to the employer in relation to his employment are not liable to the GST. Section 9(3) and Section 9(4) of the CGST Act, 2017 contains the provisions with respect to reverse charge mechanism in respect of certain services which are notified from time to time. Notification 13/2017–CT (R) dated 28-06-2017 vide entry No. 6 provides for levy of reverse charge mechanism on services provided by a director of the company or a body corporate to the said company or body corporate. Further, Schedule III of the CGST Act, 2017 provides for certain transactions that are neither considered as supply of goods nor supply of service.

In a recent AAR ruling held in the state of Rajasthan dated 8^th April 2020, AAR said in the case of M/s. Clay Craft India Pvt. Ltd. that the consideration paid to Directors by the applicant company will attract GST under reverse charge mechanism as it is covered under entry No. 6 of Notification No. 13/2017 Central Tax (Rate) dated 28.06.2017 issued under Section 9(3) of the CGST Act, 2017.

The AAR said that the Director is the supplier of the services and the applicant of the company is the recipient of the services. So, we can say that as per the above ruling all the directors are considered non-whole time directors for the purpose of the GST. Hence, services provided by them are considered as their professional services provided by them to the company for which the company has to charge GST under reverse charge mechanism.

Conclusion
Through the ongoing discussion and findings of the ruling pronounced by the Honorable Authority of Advance Ruling, it has been concluded that directors who are not employees of the company and the remuneration paid to them by a company are for the services provided by the directors to the company. Thus, the same is covered under entry 6 of the Notification 13/2017 – CT dated 28-06-2017 and liable to GST under reverse charge mechanism.

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