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Remuneration To Directors Will Attract GST, Says Authority For Advance Rulings

Director salaries can’t attract GST and it’s an incorrect precedent that requires clarification, experts say.  

Independent directors of company boards have significant responsibilities under the Companies Act and are part of various committees, including those related to remuneration. (Photographer: Giulia Marchi/Bloomberg)
Independent directors of company boards have significant responsibilities under the Companies Act and are part of various committees, including those related to remuneration. (Photographer: Giulia Marchi/Bloomberg)

In an order that could set precedent, the Rajasthan Authority for Advanced Ruling held that consideration paid to directors by a company will attract the goods and services tax. Companies will be taxed under the reverse-charge mechanism where a recipient of goods or services pays the tax instead of the supplier.

Experts said the ruling is against the position laid down by courts under the erstwhile indirect tax regime—that employer-employee relationship cannot be taxed.

It’s a regressive interpretation of the GST Act and rules and it equates ‘consideration’ with ‘salary’, Anish Tripathi, an independent GST consultant, told Bloomberg Quint. “This will increase harassment faced by companies, as armed with this ruling, GST officers may start issuing notices to them.”

Crockery maker Clay Craft India Pvt. Ltd. had sought an advanced ruling on the applicability of GST on salary paid to its directors. They were employed full-time and the company was deducting tax at source (TDS) and contributing provident fund on their behalf. It was already paying GST on a reverse-charge basis on the commission paid to the directors.

Directors’ Services Taxable, Says AAR

Consideration in the form of salary and commission to directors is against the services provided to the company, according to the AAR. Therefore, the company is a ‘recipient’, while the directors are ‘suppliers’ of the services, it said. Such a consideration would therefore become liable to tax under the reverse-charge mechanism, the AAR ruled.

The authority relied on the June 2017 circular issued by the tax department which identifies directorial services that are taxable on a reverse-charge basis.

The June 2017 circular deals with exigibility of remuneration paid to non-employee directors for services like attending board meetings, etc., Arvind Baheti, executive director at law firm Khaitan & Co., said. It’s for the services of such non-employee directors that a company becomes liable to pay GST on a reverse-charge basis, he said. Commission is generally paid over and above the salary and Clay Craft may have not have properly brought out this fact before the authority, he said.

Service by directors, who are full time employees of a company, are not considered as a supply of goods or service and are not taxable as per Schedule III of the CGST Act. However, there can be directors who are not in full-time employment with the company. Services rendered by such directors are not considered to be ‘in the course of employment’ and become taxable under the reverse-charge mechanism
Arvind Baheti, Executive Director, Khaitan & Co.

Jigar Doshi, partner at TTMS LLP, agreed and said the ruling is bad in law and legally unsustainable. The fact that employer-employee relationship cannot be taxed is well established by courts in their rulings under the erstwhile tax regimes, he said.

The same principle must be carried forward into the GST regime as well. Whole-time directors are employees of the company and hence there is no scope of taxing salaries or consideration paid for their services under reverse-charge mechanism.
Jigar Doshi, Partner, TTMS LLP

This is also contrary to the recent order of the Service Tax Tribunal in the Allied Blenders case where it held that salaries cannot be taxed under the service tax regime, Doshi said.

Different state AARs may now rely on this order as a precedent to issue similar rulings, Tripathi said.