Opinion on Remuneration paid to directors to attract GST ruling requires re-consideration

Advance Ruling no : RAJ/AAR/2019-20/33

In the words of the Author

GST applicability on Remuneration paid to directors should be determined based on the principle of whether a director is an employee of a company, but, the GST legislation has not defined the terms ‘director’ and ‘employee’. So in this regard, a reference to other laws including the erstwhile regime of service tax should be made to make an opinion on the definition of the terms ‘director’ and ‘employee’.

As per the provision of Companies Act, ‘director’ means a director appointed to the Board of a company. Also, some directors are nominated by the Financial Institutions/Foreign Collaborators/banks/investors to form part of the board of directors. The Board has also powers to fill casual vacancies and appoint additional directors. All these directors collectively form a Board. The Board of Directors is the controlling authority of the company under the Companies Act, 2013.

Further, a classification of Directors have been done, where -

Directors who are in the whole-time employment or those who are entrusted with day-to-day operations of the company are termed as 'Executive Directors'.

Non-executive directors do not take part in the day-to-day activities of the company and do not have the knowledge about the routine operations of the company. They only attend the meetings of the board of directors or its committees and thus, work only at a periodic interval on a part-time basis.

An ‘independent director’ has been defined as a director not being a managing director or a whole-time director or a nominee director.

From the above context, we can say that non-executive directors including independent directors cannot be treated as an employee of the company.

Further, Directors who are in the whole-time employment of the company are termed as 'whole-time directors'. Some directors may be appointed as 'Managing/Whole-time Director' who will be entitled to monthly remuneration and 'Managing Director’ need not necessarily be in full-time employment.

Non-Executive Directors are entitled to fees for attending the Board meetings or Committee meetings. But a managing director or a whole-time director, who is getting remuneration, is not entitled to sitting fee.

The conclusion can be seen that the Companies Act, 2013 permits payment of remuneration to both Executive and Non-Executive Directors. Executive Directors are treated as employees. Sitting fees is paid to the directors, not being whole-time directors and managing director, and they are not be considered as employees.

As per the provisions of the Income Tax Act, To tax any amount under the head ‘Salary’ there must be an existence of employee and employer relationship and in the absence of the employer-employee relationship, the income shall be assessable either as business income or income from other sources. So, to determine whether a director is an employee of the company or not, one has to find out as to whether the relationship of master and servant exists between the company and the director.

The conclusion can be seen that under the provision of Income-tax it is immaterial whether the director is the Managing director or Independent director, a director can be treated as an employee only if the relationship of master and servant exists between the company and the director.

In the erstwhile service tax regime, services rendered by an employee to the employer in the course of or in relation to his employment were outside the scope of service tax. Thus, no service tax was levied where the remuneration was paid for routine work but not for the consultancy services.

Based on the principles cited above under Companies Act, Income-tax Act, and erstwhile Service tax regime, it can be concluded that the consideration (except sitting fees) paid to the directors engaged in whole-time employment with the company will be treated as part of the salary, and will be excluded from the ambit of GST. The sitting fees paid or payable to the independent directors should be brought within the ambit of GST.

It appears that the AAR, Rajasthan had not evaluated the issue from the view-point of such principles.

It just placed its reliance on the notification issued under the RCM. The taxability of the director's remuneration under the GST should be determined on the basis of the fact whether the director is involved in routine work of management or not.

For Original Advance Ruling, Kindly Click on the link below: https://drive.google.com/open?id=1AlgXYyNaTVKS6JezGgvfsX2S1tQzO6m6