Full time Director receiving salary is not liable for GST, AAR Karnataka Bench
One of the most awaited decision and controversy on remuneration paid to directors is to be charged under GST or not has been finally put to rest by the decision of the Authority for Advance Rulings (AAR), Karnataka bench order dated 4th May 2020. This particular subject came into light when Anil Kumar Agrawal, who had received salary as a director from a private company, had approached the bench. In this article we will see about the issues raised and the ruling brought forth by the bench. There were a number of other factors in this case but we will specifically throw light on the ruling related to Directors remuneration in this article.
Facts of the case
Anil Kumar Agrawal a resident of Bangalore an unregistered person has filed an application for Advance ruling under section 97 of CGST Act 2017 read with Rule 104 of CGST Rules 2017 and section 97 of KGST Act 2017 read with Rule 104 of KGST Rules 2017, in FORM GST ARA 01 discharging the fee of Rs. 5000 each under the CGST Act and the KGST Act. The applicant an unregistered person is in receipt of various types of incomes/ revenues one of which is Salary as Director from Private Limited Company. Some Other revenues are Partners salary as partner from his partnership firm, Residential rent, Dividend on shares, Interest received on loan, Interest received on Debentures etc.
In view of the above the applicant has asked for Advance Ruling with respect to following questions
- Out of the given sources of Income/ Revenue which all revenue income shall be considered for Aggregate Turnover for registration?
- Out of the given nature of income / revenue, when the supply, even if exempted, need to be considered
We will focus if Directors remuneration falls in the ambit of GST or not and shall that income be considered for Aggregate Turnover for registration or not.
Admissibility of the application
It was observed that only one question is covered under Section 97(2)(f) of the CGST Act 2017, that too in an indirect way as the question is about aggregate turnover for registration. Therefore the application was partially admissible.
Applicants interpretation of Law in relation to Directors salary
The applicant furnished his understanding and interpretation of law as follows, The income received towards partners, from partnership firm and also the income received towards salary as Directors from Private Limited Company are not includable in Aggregate turnover for the reason that any type of salary is not in the purview of GST as the same needs to be treated neither as supply of goods nor as supply of services.
- The applicant, an unregistered dealer being in receipt of various types of income and intends to know if the income so received in each type is includable in the Aggregate Turnover, for the purpose of registration, under the provision of GST Act.
2. For the firstly let us understand the definition of Aggregate Turnover under Section 2 (6) of the CGST Act 2017, which is read as under,
“ aggregate turnover”, means the aggregate value of all taxable supplies ( excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods o services or both and inter- state supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, state tax, union territory tax, integrated tax and cess.
3. It is observed that aggregated turnover is a sum of different supplies. Therefore any amount to be included in aggregate turnover need to be related to any transactions that amounts to supply in terms if section 7 (1)(a) of the CGST Act 2017
To qualify under the definition of supply under section 7 (1)(a) the following components must be considered,
a. The transaction must involve a supply of goods and services or both, such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made,
b. The transaction must be for a consideration by a person
c. The transactions must be in the course of furtherance of business
In the view of the above income received from each source has to be examined as to whether it is in relation to any transaction that amounts to supply or not
4. Salary received as Director from Private Limited Company: The applicant is in receipt of certain amount of termed as salary as Director of a private limited company. Two possibilities may arise with regard to instant issue of amount received by the applicant. The first possibility that the applicant is the employee of the said company (Executive Director), in which case the services of the supplicant as an employee to the employer are neither treated as supply of goods nor as supply of services, in terms of Schedule III of CGST Act 2017.
The second possibility is that the applicant is nominated director (Non-Executive Director) of the company and provides the services to the said company. In this case the remuneration paid by the company is exigible (i.e. able to be charged or levied) to GST in the hands of the company under reverse charge mechanism under 9 (3) of the CGST Act 2017, in the hands of the company, under entry no. 6 of Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017.
In the Instant case the applicant has not furnished any documentary evidence such as copy of agreement between the applicant and the said private company, copy of appointment order, details of ESI, PF deductions etc., so as to decide whether the applicant is in receipt of salary as an employee or as an independent director. Thus in the absence of any documentary evidence, it is not possible to decide whether the amount received by the applicant is towards his services as an Executive Director or No Executive Director.
Ruling and Order
In view of the above, the remuneration received by the applicant as Executive Director is not includable in the aggregate turnover, as it is the value of the services supplied by the applicant being an employee. Further, if the applicant receives the remuneration as a Non- Executive Director, such remuneration is liable to tax under reverse charge mechanism under section 9 (3) of the CGST Act 2017, in the hands of the company, under entry no. 6 of Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017. Thus the value of the said services of the applicant being Non- Executive Director are includable in the aggregate turnover, as it is the value of the taxable services supplied by the applicant, though the tax is discharged by the private limited company, under reverse charge mechanism.
The bench therefore clarified that if the director is an employee of the company, there will be no incidence of GST. However, if the director is a non-executive director (that is, a nominated director), and provides his or her services to the company, then the remuneration paid is subject to GST. In such cases, the ‘reverse-charge’ mechanism will apply and it is the company (recipient of the services) who will pay the GST. Thus AAR rulings have a persuasive role in similar cases. Thus, this ruling will be useful to India Inc to substantiate that GST does not arise in case of remuneration paid to fulltime directors.