GST on Director Remuneration: A Comprehensive Analysis

The recent clarification issued by the Central Board of Excise and Customs (CBEC) through Circular No. 140/10/2020 - GST, dated 10th June 2020, has brought clarity regarding the applicability of Goods and Services Tax (GST) on remuneration paid to directors. This article aims to provide a comprehensive overview of the tax implications and the criteria for applicability of GST on director remuneration.

Introduction

The primary issue in deciding whether GST applies to director remuneration revolves around the status of the director—whether they are considered an employee or a non-employee of the company. This distinction is crucial as it determines the applicability and method of taxation under the GST regime.

Applicability of GST on Director Remuneration

CBEC's clarification emphasizes that GST is indeed applicable on remuneration paid to directors, provided they are not considered employees of the company. According to the CBEC's circular and subsequent clarifications, the key factors to consider are the nature of the director's involvement in company operations and the relationship between the director and the company.

Reverse Charge Mechanism (RCM)

When a director is not an employee of the company, the remuneration paid to them is taxable under the Reverse Charge Mechanism (RCM). According to Notification No. 13/2017-Central Tax dated June 28, 2017, the recipient of the services (the company) is required to pay GST on the reverse charge basis. This means that the company must pay GST at the rate applicable to the recipient, which can be up to 18% or more, depending on the nature of the service.

Managing Director as an Employee

It is important to note that a Managing Director, who is typically considered to be an employee of the company, is exempt from GST on remuneration paid to them. According to the Central Goods and Services Tax (CGST) Act, 2017, services provided by an employee to their employer are exempt under Schedule III of the CGST Act.

Judgment by the Appellate Authority of Rajasthan (AAR)

A recent judgment by the Appellate Authority of Rajasthan (TS-218-AAR-2020-NT) provides further clarity on the matter. The Appellate Authority upheld the taxability of director remuneration under the reverse charge mechanism. Notably, the AAR emphasized that 'consideration' paid to directors for services rendered, even if in the form of salary, is subject to GST if the directors are not considered employees. The AAR ruled that the directors are not employees and, therefore, the services they provide to the company are subject to GST under the reverse charge mechanism.

Conclusion

The applicability of GST on director remuneration is a complex issue that hinges on the legal and administrative interpretation of the service. Companies must carefully assess whether their directors fall under the employee or non-employee category to avoid any potential legal and financial pitfalls. Understanding the reverse charge mechanism and its implications is crucial for compliance with GST regulations in India.