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Aanchal Kesari, Senior Associate
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Aditya Dokania, Associate, Amicus Advocates & Solicitors


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Directors Remuneration under GST: In light of Clayton Crafts Ruling

Print Document  23 Apr 2020

Supply of Services by directors to company is covered under Notification No. 13/2017–Central Tax (Rate) dated 28.06.2017 and attracts GST on Reverse Charge Mechanism (RCM) Basis. Considering the above notification, AAR Rajasthan in M/s Clay Crafts India[1] has recently ruled upon the question on whether duties rendered by directors in the course of employment as an 'employee', can attract GST or not. As per the order passed by AAR, remuneration/salary paid towards performance of services/ duties by the Director will be liable for GST.

We have examined the AAR Order in detail: -

Facts

Applicant pays GST under RCM on any commission paid to the directors for performance of services. Apart from remuneration, the applicant pays salary to the directors which is shown under "Income from Salary" by the directors in their Income Tax Return.

Issue

Whether GST shall be charged on RCM basis on the salary part paid to the directors of company who are working as 'employee'?

AAR Order

The AAR made following observations: -

(i)   Consideration paid to the directors against the supply of services provided to the Taxpayer is not covered under Schedule III of the CGST Act, 2017, as directors are not 'employee' of the Applicant.

(ii)  Director is the supplier of services and applicant company is the recipient of the service; and services rendered by the director to the company for which consideration is paid to them in any head is liable to pay GST under RCM.

(iii)  Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017 has given a distinct identity to the services provided by the directors and specifically includes services rendered by directors on which GST is payable on RCM.

Conclusion

As per Section 103 of the CGST Act, AAR Order, passed by Commissioner is binding only on the applicant who has applied for such ruling. Hence, the above order will not be applicable for all taxpayers. However, such orders manifest the perspective of department in interpreting provisions and becomes relevant for analysis.

Sadly, AAR passed the above order without considering various decisions of Supreme Court and CESTAT. Supreme Court in Ram Pershed Case[2] on the basis of facts and circumstances, held that directors are employed by the company and hence, remuneration paid to them is in the form of salary. A similar observation was made by Supreme Court in Apex Engineering Case[3] wherein the court held that Managing Director appointed by Board of Directors for annual remuneration amounting to Rs. 12,000 even when treated as principal employer, can also be treated as employee, and can perform duty in dual capacity.

This further finds support in CESTAT decision of Allied Blenders and Distillers Case[4]. In this case, taxpayer paid remuneration to four whole time directors for managing day-to-day affairs of company and made necessary deductions on account of Provident fund, Professional Tax and TDS. Taxpayer also declared these directors to all statutory authorities as employees of company. On the basis of above understanding, the tribunal held that remuneration paid to directors was nothing but salary and taxpayer was not required to discharge service tax on remuneration paid to Directors.

According to Schedule III of the CGST Act, 2017, services by an employee to the employer in the course of or in relation to his employment is exempt under GST. Hence, given the above understanding of the nature of duties performed by directors, GST should not have been charged on the activities performed by directors in course of employment as an 'employee'.

It seems that AAR Rajasthan have not examined whether the duties performed by Director was in course of employment as an 'employee'. Hence, the position appears to be inconsistent with the above decision.

Going forward, in light of the above order, the applicability of GST on remuneration paid to the directors shall be decided upon the facts and circumstances of each case.

 

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Disclaimer: The views expressed in this article are personal. The publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.

 



[1] Advance Ruling No. RAJ/AAR/2019-20/33

[2] Ram Pershed Case vs. Commissioner of Income Tax, 1973 AIR 637

[3] Apex Engineering Case, 1998 (1) SCT 63 (SC).

[4] Allied Blenders and Distillers P Ltd. v. CCE, (2019) 24 GSLT 207 (CESTAT)