Is Salary to Directors liable to GST under Reverse Charge?
A ruling by Rajasthan AAR justifying levy of GST on the salaries paid to the director under reverse charge mechanism has triggered debate in the corporate world. Industry has urged intervention of GST Council into the matter and sought clarification.
As an industry common practice, Directors are appointed as whole-time employees by the entities and are also taken on the payroll. They work according to their job profile and maintain employer – employee relationship with the entity.
Their salaries are subject to TDS under section 192B, social benefits, etc. like any other employee in the entity, and they are also eligible to other perquisites that are available to any other employees including medical insurance, group health insurance. Apart from salary, some entities also pay commission to their Directors for the businesses generated by them.
According to provisions of GST, services by an employee to the employer in the course of or in relation to their employment are outside the ambit of GST (as per schedule III of the CGST Act).
Further, GST on services supplied by a Director of a company or a body corporate to the said Company or the body corporate is payable under reverse charge.
The notification which made Company liable to pay GST under RCM is issued under section 9(3) of the CGST Act, however, this RCM notification could not be held to be a charge of GST. If GST could not levy under section 9(1) of the CGST Act (read with section 7), the tax payment under RCM could not arise.
In a recent ruling by Rajasthan Authority for Advance ruling in case of Clay Craft India Pvt. Ltd, where they said that Directors could not say to be an employee of the Company even if they are appointed as such. They are the service providers and entities are the recipient of such services.
Hence, according to Authority for Advance Ruling, GST shall be levied under section 9(1) even on the salary paid to Directors as the exclusion of schedule III is not applicable for them.
Clay Craft India Pvt. Ltd, the Jaipur based company producing bone china crockery, transfer sheet decalcomania, utensils items, and Moulds & Die items had approached Rajasthan AAR early this year and filed an application seeking law interpretation for a fair opinion on the subject.
The Rajasthan Authority for Advance Ruling dated February 20, 2019:
The consideration paid to the Directors by the applicant company will attract GST under reverse charge as it is covered under entry no. 6 of Notification No. 13/2017 Central Tax (Rate) dated 28/6/17 issued under section 9 (3) of CGST Act 2017. The hearing happened on February 5, 2020.
Author’s Comments:
The principle provisions under GST are the same as of Service tax regime in so far it is related to taxation of services of Director under RCM, and there were no such questions by the department then. The Govt. should come up with some more clarity on this issue so that tax authorities do not take leverage of the advance ruling and issue demands on the entities.
The GST Council should intervene in the matter and issue a clarification on an urgent basis as the Ruling might attract a huge amount of litigation. A similar ruling has also been issued earlier by the Maharashtra Authority for Advance Ruling.
About the Author:
Atul Puri, Partner, ShineWing India – an Indian arm of ShineWing International, a global network of independent accounting and consulting firms worldwide.
