The Rajasthan Authority for Advanced Ruling recently held that consideration paid to directors by a company will attract the goods and services tax. Companies will be taxed under the reverse-charge mechanism where a recipient of goods or services pays the tax instead of the supplier.

Director Remuneration liable to GST under Reverse Charge Mechanism:

Reverse charge is a mechanism under which the recipient of the goods or services is liable to pay the tax instead of the provider of the goods and services. Under the normal tax regime, the supplier collects the tax from the buyer and deposit the same to the government. But under reverse charge mechanism (RCM), liability to pay tax moves from supplier to recipient.

As per entry 6 of notification No. 13/2017 Central Tax(rate) dated 28.06.2017 issued under section 9(3) of the CGST act 2017, the remuneration paid to the directors by the company will attract GST under the reverse charge mechanism.

Analysis of the advance ruling sought by Clays Crafts India Pvt Ltd

Facts of the case:

1. The applicant Clays Crafts India Pvt Ltd is a registered company engaged in the manufacture of bone China Crockery, Transfer Sheet Decalcomania, other Utensils Item and Moulds & Die falling under chapter heading No. 69111011, 49081000, 84801000 & 84801000 of the Tariff.
2. The company is registered under GST having GSTIN 08AAACC6866D1ZO and also availing ITC on inputs as well as services in relation to manufacture of final product as per the provisions of GST Act, 2017.
3. All the directors of the companies are performing all the duties and responsibilities and duties as required under the laws also all directors are also working in the company at different management level of the company and each one of them is holding charge of procurement of raw material, production, quality checks, dispatch, accounting etc.  In other words, they are also working as an employee of the company for which they are being compensated by the company by way of regular salary and other allowances as per the company policy and as per their employment, contract. In fact these Directors are treated at par with any other employee of the company as far as their employment is concerned. The company is deducting TDS on their salary and PF laws are also applicable to their service. Therefore, in all practical purposes these directors are the employees of the company and are working as such besides being Director of the company;

Questions on which the Advance ruling is pursued:

M/s Clay crafts India Pvt Ltd has sought advance ruling for the following questions:

1. Whether GST is payable under reverse charge mechanism the salary paid to Director of the company who is paid salary as per contract.
2. Whether the situation would change from (a) if the director also is a part time director in the company also.

Observation of the AAR bench:

The Rajasthan bench of Authority for Advance ruling has laid down their findings and analysis of the above questions:

1. While going through the detailed submission by the applicant the bench observed that presently there are six Directors in the Company and all of them working at different level of management and each one of them is holding charge of procurement of raw material, production, quality checks, dispatch, accounting etc.
2. Further they observed that Consideration in form of salary and commission paid to the Directors by the company is against the services provided by them to the company and the company is recipient of such service and Directors are the supplier.
3. The applicant is already paying GST by way of reverse charge mechanism on the commission paid to the Directors treating as such amount pertain to the service provided by them in the capacity of a Director.
4. In the instant case question before the bench is whether the consideration paid to the Directors for providing services to the company is liable for GST under reverse charge mechanism vide Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017.
5. The term “consideration” in relation to the supply of goods or services or both is defined in clause (31) of Section 2 of CGST Act, 2017 as under-:

(31) “consideration” in relation to the supply of goods or services or both includes-

• any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
  • the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;”

• The bench observed that the consideration paid to the Director for the supply of services to the Company is specifically covered under Notification No. 13 /2017- Central Tax (Rate) dated 28.06.2017 which states that “on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4)” The relevant portion of the said Notification is as under-:

Notification No.13 /2017- Central Tax (Rate) dated 28.06.2017

S.No.	Category of Supply of Services	Supplier of Services	Recipient of Services
1	2	3	4
6	Services supplied by a Director of a company or a body corporate to the said company or the body corporate	A director of a company or a body corporate	The company or a body Corporate located in taxable territory

1. Further it has been observed that consideration paid to the Directors is against the supply of services provided by them to the applicant company and are not covered under clause (1) of the Schedule III to the CGST Act, 2017 as the Directors are not the employee of the Company. In the instant case Director is the supplier of services and the applicant company is the recipient of the services. So, it is very clear that the 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.
2. It has also been observed that the applicant company is located in the taxable territory and the Director’s consideration is paid for the supply of services by the Directors to the applicant company and hence the same is liable to GST by way of reverse charge basis as provided under Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017 issued under Section 9(3) of the Central Goods and Services Tax Act, 2017.
3. Notification No. 13 /2017- Central Tax (Rate) dated 28.06.2017 has given the distinct identity to the services provided by the Director and specifically included in the category of service on which GST will be payable under RCM. The case laws citied by the applicant are not relevant in the present case in as much as that the liability to pay GST under RCM in this case is required to be decided on the basis of the existing provisions of CGST law as being discussed briefly in this order.

Final conclusion of the Bench:

The Rajasthan bench of AAR finally concluded that:

1. As per entry 6 of notification No. 13/2017 Central Tax(rate) dated 28.06.2017 issued under section 9(3) of the CGST act 2017, the remuneration paid to the directors by the company will attract GST under the reverse charge mechanism.
2. Situation will remain same as (a) above and will attract GST under reverse charge mechanism even if the director also is a part time director in the company also.

Our Conclusion

The fact that employer-employee relationship cannot be taxed is well established by courts in their rulings under the erstwhile tax regimes.

Employer-employee relationship cannot be taxed as in which salary is paid which is not consideration. Further the reverse charge is applicable only in cases of director receiving commission income or sitting fees etc in which there is no employer employee relationship.

Section 7 of the CGST Act provides the definition of supply. Section 7(2)(a) provides the activities or transactions specified in schedule -III would be treated neither as a supply of goods nor a supply of services. Schedule III – treats the services by an employee to the employer in the course of or in relation to his employment neither supply of goods nor supply of services.

GST law allows a taxpayer to apply for an advance ruling to obtain clarifications from the Authority for Advance Ruling (‘AAR’). The CGST Act, provides that the order advance ruling pronounced by the Authority or the Appellate Authority shall be binding only on the applicant who had sought it in respect of any matter. Thereby it shall not be binding on any other taxpayer or company who has not applicant in that advance ruling. However, one needs to carefully consider the facts of each case to determine whether the amount paid to a director is with respect to his employment with the company or with respect to an independent professional.

There are chances that GST department starts sending Notices to all companies which may lead to litigation. we expect government to clarify this soon