When the Goods and Service Tax Act was introduced, there were many doubts and clarifications were raised by industries as to what falls within the ambit of GST and what does not? GST is levied and applicable to the supply of goods and services.
However, the GST Act has specified certain activities that are not liable for GST. These activities are classified as neither supply of goods nor supply of services under Schedule III of the GST Act. Thus these activities are exempted from GST. Many industries sought the help of Advance Rulings for doubt whether the remuneration paid to the director of the company falls within the ambit of Schedule III or if it falls under a category of GST to be paid on reverse charge.
Types of Directors
For a better understanding, we need to classify directors. The director of a company can be an independent director or a whole-time director.
An independent director is one who is not an employee of the company and where a contract of employment does not exist. An independent director acts in an independent professional capacity.
A whole-time director is one who is an employee of the company and such a director performs his duties under a contract of employment with the company. There is a clear relationship of an employee and an employer relationship between the company and a whole-time director.
Applicability of GST on the Remuneration paid to Directors
As per entry 6 of notification No. 13/2017 13/2017 – Central Tax (Rate) dated 28.06.2017, states that supply of service by a director of a company or a body corporate shall be liable to Goods and Service Tax and the recipient of these services shall pay GST on reverse charge basis.
Is the entire salary/remuneration liable to GST?
Rajasthan Authority of Advance Ruling stated that companies are liable to pay GST on the remuneration paid to the directors of the company. Accordingly, service provided by a director to the company or a body corporate shall be liable to GST to be paid on reverse charge basis by the recipient. However, the question arises whether entire remuneration shall be liable for GST.
The Central Board of Indirect Taxes and Customs, issued a clarification vide Circular No 140/10/2020-GST, stating that GST shall be applicable on a reverse charge basis, on the remuneration paid to the directors who are not an employee of the company and/or any remuneration paid to them is not in the form of salary for the services provided as part of the employment in the company.
Thus, it should be noted that whether the amount of remuneration being paid to the director is in the form of a salary or is in the form of fees. GST is liable on the director’s remuneration which is not paid in the form of salary. Thus any remuneration paid to an independent director shall be in the form of fees and shall be liable to GST on reverse charge basis. Remuneration paid to a whole-time director in the form of salary shall not attract GST. However, any amount paid to a whole-time director for any services provided other than as an employee shall be liable to GST on a reverse charge basis. Thus, it can be simplified by ascertaining whether the amount paid to a director as salary is where Section 192 of the Income Tax Act applies or Professional Fees where Section 194J of the Income Tax applies. Any amount paid where Section 194J applies shall be liable for GST to be paid on reverse charge basis by the recipient of such services.
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