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

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If supplier who provides the service of renting of motor vehicle opts for GST @ 5%, then the said service is covered under RCM

If supplier who provides the service of renting of motor vehicle opts for GST @ 5%, then the said service is covered under RCM

Generally, under GST provisions, the liability of pay tax rests on supplier. However, in certain cases the liability to pay GST to the government falls on the recipient. This is known as reverse charge mechanism which is covered under Notification No. 13/2017- Central Tax (Rate). As per section 2(98) of CGST Act’ 2017, “reverse charge” means the liability to pay tax by the recipient of the supply of goods or services or both instead of the supplier of such goods or services or both.

The Governor of the National Capital Territory of Delhi, on the recommendations of the Council amended the notification of the Government of the National Capital Territory of Delhi, in the Department of Finance (Revenue-1), No.13/2017- State Tax (Rate), dated the 30th June, 2017.

Notification No. 22/2019- Central Tax (Rate) dated 30th September, 2019

The said notification notified services provided by way of renting of a motor vehicle provided to a body corporate located in the taxable territory, by any person other than a body corporate, paying central tax at the rate of 2.5% on renting of motor vehicles with ITC only of input service in the same line of business under RCM. This was covered under Entry No 15.

Notification No. 29/2019- Central Tax (Rate) dated 31st December, 2019

There was ambiguity among the taxpayers in regard to the applicability of the reverse charge on the renting of motor vehicle. Hence, Government clarified that:

There are only two rates applicable on the service of renting of vehicles, 5% with limited ITC and 12% with full ITC.

  • Where the supplier of the service charges GST @12% from the service recipient, the service recipient shall not be liable to pay GST under RCM
  • Where the supplier of the service doesn’t charge GST @ 12% from the service recipient, the service recipient shall be liable to pay GST under RCM

The above notification was introduced to amend Notification No. 22/2019- Central Tax (Rate).

The government notified the amendment of Entry No 15 which now said that, services provided by way of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient, provided to a body corporate located in the taxable territory, shall be covered under RCM.

In other words, suppliers of service by way of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient have an option to pay GST either at 5% with limited ITC of input services in the same line of business or 12% with full ITC.

The condition is that the credit of input tax charged on goods or services used in supplying the service has not been taken, it shall mean that:

  • credit of input tax charged on goods or services used exclusively in supplying such service has not been taken; and
  • credit of input tax charged on goods or services used partly for supplying such service and partly for effecting other supplies eligible for input tax credits, is reversed as if supply of such service is an exempt supply and attracts provisions of section 17(2) of the CGST Act, 2017 and the rules made thereunder.
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“Body corporate” for the applicability of reverse charge has same meaning as assigned to it in section 2(11) of the Companies Act, 2013 which includes a private company, public company, one personal company, small company, Limited Liability Partnerships, foreign company etc.

 “Body corporate” or “corporation” includes a company incorporated outside India, but does not include:

  • a co-operative society registered under any law relating to co-operative societies; and
  • any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;

Is the GST paid under reverse charge eligible for input tax credit?

Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Government has put restriction on input of renting of motor vehicle under section 17(5), which states that input tax credit shall not be available in respect of renting or hiring of motor vehicles except when used for the purpose specified therein.

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply.

Hence, input would be available only if registered person paying GST under reverse charge engaged in same line of business.

What compliances are required to be followed in respect of supplies under RCM?

  • As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge.
  • This also needs to be mentioned in receipt voucher as well as refund voucher. (if tax is payable under RCM)
  • Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge
  • Any amount payable under RCM shall be paid by debiting the electronic cash ledger.
  • Reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.
  • Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B of GSTR-1.
  • Advance paid for reverse charge supplies is also leviable under GST. The person making advance payment has to pay tax on reverse charge basis.

The service of renting of motor vehicles, has been bring under the mechanism of reverse charge for the purpose of relief to the suppliers which are small businesses and are transport service provider as we have discussed already and not to create an additional burden on the service recipient. There are only two rates in GST for renting of motor vehicle i.e., 5% with ITC in same line of business and 12% with full ITC. Meaning thereby, if supplier does not charge GST @ 12% in the invoice, it means he needs to opt it for GST rate @5% and therefore, when he opts for this rate, then service automatically shifts into reverse charge mechanism. Accordingly, if taxpayer opts for GST @ 5%, then the said service is covered under reverse charge mechanism.

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Know all about RCM applicability under GST on Directors Services

Know all about RCM applicability under GST on Directors Services

Introduction

Generally under GST provisions, the liability of pay tax rests on supplier. However, in certain cases the liability to pay GST to the government falls on the recipient. This is known as reverse charge mechanism which is covered under Notification No. 13/2017- Central Tax (Rate).

According to the said notification, services supplied by a director of a company or a body corporate to the said company or the body corporate are covered under RCM provisions (liability to pay tax falls on the company or body corporate).

For instance Mr. A is an Independent Director who provides services to XYZ Pvt Ltd. Consideration received by Mr. A from XYZ Pvt Ltd is covered under the RCM provisions. Liability to pay tax to the government falls on XYZ Pvt Ltd.

Do all services provided by director’s fall under the RCM provisions?

Schedule III to CGST Act 2017 covers activities or transactions which shall be treated neither as a Supply of Goods nor a Supply of Services. Services by an employee to the employer in the course of or in relation to his employment are covered under Schedule III (not taxable under GST).

Circular No: 140/10/2020 – GST was introduced to provide Clarification in respect of levy of GST on Director’s remuneration. The provisions covered in this circular are as below:-

DirectorsTaxability
Directors who are not the employees of the company [Independent directors]Taxable on RCM basis in the hands of the company
Directors who are employees functioning according to the contract of employment Where TDS under Income Tax law is deducted u/s 192 (salary payment)Not Taxable
Directors who are employees, but are not functioning according to the contract of employment Where TDS under Income Tax law is deducted u/s 194J (payment of professional fees)Taxable on RCM basis in the hands of the company)

Points to be noted:-

  1. A Whole Time Director may or may not be the employee – As per section 2(94) of the Companies Act, 2013 a whole time-director is an inclusive definition, and thus he may be a person who is not an employee of the company
  2. Section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it clear that an independent director should not have been an employee or proprietor or a partner of the said company, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.
  3. Directors function in dual capacity – capacity of director and in capacity of employee. Test would be whether it is a “contract for service” or “contract of service”.

What is an important test to determine whether GST is leviable on services provided by directors?

The following criteria needs to be fulfilled in order to not constitute as a supply under GST:-

  1. There should be an Employer-employee relationship (master servant relationship).
  2. TDS is deducted u/s 192 and not u/s 194J of the Income Tax Act.
  3. It should be a contract of service and not a contract for service.

Example where RCM is applicable on services provided by directors

Mr Q is a director of ABC Pvt Ltd. On payment of consideration to Mr Q, ABC Pvt Ltd deducts TDS u/s 194J of Income Tax Act (TDS on professional fees). IS GST chargeable on this amount?

Services provided by Mr Q constitute as a supply under GST as there is not employer-employee relationship, which is proved by the fact that TDS is deducted u/s 194J. Consideration received by the director is taxable on RCM basis in the hands of the company.

What is the time of supply for supply of director’s services when they are covered under RCM?

The Time of supply is the point when the supply is liable to GST. In reverse charge, recipient is liable to pay GST. Therefore, time of supply for supplies under reverse charge is different from the supplies which are under forward charge.

Time of Supply shall be earliest of:-

  1. the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier
  2. 61st date from the date of issue of invoice

If it is not possible to compute time of supply using above method, the time of supply shall be the date of entry in the books of account of the recipient of supply.

For instance,

Date of payment – 15th July 2019

Date immediately after 60 days from the date of issue of invoice (Suppose the date of invoice is 15th May 2019, then 60 days from this date will be 14th July 2019)

Date of entry in books of receiver 20th July 2019

Time of supply of service, in this case, will be 14th July 2019

Can a supplier avail Input Tax Credit (ITC) on GST paid under RCM?

A supplier (director) cannot take ITC of GST paid on goods or services used to make supplies on which recipient is liable to pay tax.

Who can avail the benefit of ITC on services provided by a director to a company or body corporate?

  1. The question of availing ITC does not arise on cases which do not constitute as a supply under GST (employer-employee relationships).
  2. The recipient (company or body corporate in this case) can avail ITC of GST amount that is paid under reverse charge on receipt of services (cases where employer-employee relationship does not exist)

What is the GST payable on services provided by directors when they constitute as a supply under GST?

GST Rate payable by receiver (company or body corporate) is 18%.

What compliances are required to be followed in respect of supplies under RCM?

  1. As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge.
  2. This also needs to be mentioned in receipt voucher as well as refund voucher. (if tax is payable under RCM)
  3. Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge
  4. Any amount payable under RCM shall be paid by debiting the electronic cash ledger.
  5. Reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.
  6. Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B of GSTR-1.
  7. Advance paid for reverse charge supplies is also leviable under GST. The person making advance payment has to pay tax on reverse charge basis.

Thus, it can be concluded that

i. Remuneration paid to whole time/executive/managing director in the capacity of employee is not taxable under GST.

ii. Sitting fees/ Commission paid in the capacity of director (independent directors, whole time director, executive director, managing director) is be liable to GST under RCM.

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Latest FAQ on GST liability on Director of Company as on June 2020

Latest FAQ on GST liability on Director of Company as on June 2020

Introduction

Generally under GST provisions, the liability to pay tax rests on supplier. However, in certain cases the liability to pay GST to the government falls on the recipient. This is known as reverse charge mechanism which is covered under Notification No. 13/2017- Central Tax (Rate). According to the said notification, services supplied by a director of a company or a body corporate to the said company or the body corporate are covered under RCM provisions (liability to pay tax falls on the company or body corporate)

Schedule III to CGST Act 2017 covers activities or transactions which shall be treated neither as a Supply of Goods nor a Supply of Services. Services by an employee to the employer in the course of or in relation to his employment are covered under Schedule III (not taxable under GST).

AAR Rulings pertaining to services provided by directors:-

  1. AAR of Karnataka in case of M/s. Alcon Consulting Engineers (India) Pvt. held that the remuneration to the Directors paid by the applicant are not covered under Schedule III to the CGST Act, 2017, as the Director is not the employee of the Company. The consideration paid to the Director is in relation to the services provided by the Director to the Company and the recipient of such service is the Company as section 2(93) of the CGST Act and the supplier of such service is the Director. Hence, the company is liable for the payment of GST under RCM.
  2. AAR of Rajasthan in case M/s Clay Craft India Private Limited which has held a similar view as held by AAR in case of Alcon Consulting Engineers (India) Pvt herein above despite the fact that directors are also working apart from working as Board of Directors. They are working as an Employee of the company where salary is regularly paid to the directors. TDS is also being deducted as applicable on salary u/s 192. Despite it all, it was held that director is not the employee of the company and the Consideration paid to director is covered under RCM.

Circular No: 140/10/2020 – GST was introduced to provide Clarification in respect of levy of GST on Director’s remuneration in order to avoid contradictory scenarios like above rulings.  The provisions covered in this circular are as below:-

DirectorsIs it covered under Schedule IIITaxability
Directors who are not the employees of the company [Independent directors]NoTaxable on RCM basis in the hands of the company
Directors who are employees functioning according to the contract of employment Where TDS under Income Tax law is deducted u/s 192 (salary payment)YesNot Taxable
Directors who are employees, but are not functioning according to the contract of employment Where TDS under Income Tax law is deducted u/s 194J (payment of professional fees)NoTaxable on RCM basis in the hands of the company)

Points to be noted:-

  1. A Whole Time Director may or may not be the employee – As per section 2(94) of the Companies Act, 2013 a whole time-director is an inclusive definition, and thus he may be a person who is not an employee of the company
  2. Section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it clear that an independent director should not have been an employee or proprietor or a partner of the said company, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.
  3. Directors function in dual capacity – capacity of director and in capacity of employee. Test would be whether it is a “contract for service” (i.e., professional service) or “contract of service” (i.e., employment contract).

FAQ’s on GST liability on Director of Company

1.Who are Directors of a company?

The directors are the persons elected by the shareholders to direct, conduct, manage or supervise the affairs of the company.

According to Sec. 2 (13) of the Companies Act, “Director includes any person occupying the position of director by whatever name called.”

2. What do you mean by an independent director?

Section 2(47) of the Companies Act states that an ‘independent director’ means an independent director referred to in Section 149(6). Section 149(6) provides with a descriptive list of qualifications of an independent director.

3. Can an employee be appointed as an independent director of the company?

Independent director cannot be an employee, proprietor or a partner of the said company, in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.

4. What do you mean by a whole time director?

“Whole-time Director” includes a director in the whole-time employment of the company. The definition of ‘whole-time director’ is an inclusive definition, so he may not be an employee of the company too.

5. What do you mean by a managing director?

The Board of Di­rectors generally appoints one of its members to manage the affairs of the company as a whole time officer and calls him the Managing Director. The Managing Director occupies a position of dual authority and responsibility. As a director, he attends the Board meetings and, as a manager, he performs the managerial functions.

6. What is an important test to determine whether GST is leviable on services provided by directors?

The following criteria needs to be fulfilled in order to not constitute as a supply under GST:-‘

i. Employer-employee relationship (master servant relationship)

ii. TDS is deducted u/s 192

iii. It should be a contract of service and not a contract for service

7. How are services provided by a whole time director to a body corporate covered under GST?

Here, it is essential to note whether the services provided by the whole time director are in accordance of a contract of employment or not.

i. If the whole time director is working according to a contract of employment, services provided do not constitute as a supply under GST. Hence, not taxable.

ii. If the whole time director is not working according to a contract of employment, services provided constitute as a supply under GST. Consideration received by the director is taxable on RCM basis in the hands of the company

8. How are services provided by an independent director to a body corporate covered under GST?

Services provided by an independent director constitute as a supply under GST as there is no employer-employee relationship. Consideration received by the director is taxable on RCM basis in the hands of the company.

9. Mr. A is a director employed by XYZ Pvt Ltd under the terms of an employment contract. Mr. A received salary of Rs 10 lakhs during the year. Is this consideration taxable under GST?

Services provided by Mr. A are in terms of the employment contract. There is employer-employee relationship in this case. These services will not be considered as supply under GST. Hence, not taxable.

10. How are services provided by a managing director to a body corporate covered under GST?

It is essential to find out whether the services provided by the managing director are in accordance of a contract of employment or not.

i. If the managing director is working according to a contract of employment, services provided do not constitute as a supply under GST. Hence, not taxable.

ii. If the managing director is not working according to a contract of employment, services provided constitute as a supply under GST. Consideration received by the director is taxable on RCM basis in the hands of the company.

11. What is the GST payable on services provided by directors when they constitute as a supply under GST?

GST Rate payable by receiver (company or body corporate) is 18%.

12. Who can avail the benefit of Input Tax Credit (ITC) on services provided by a director to a company or body corporate?

i. The question of availing ITC does not arise on cases which do not constitute as a supply under GST (employer-employee relationships).

ii. The recipient (company or body corporate in this case) can avail ITC of GST amount that is paid under reverse charge on receipt of services (cases where employer-employee relationship does not exist)

13. What is the time of supply for supply of director’s services when they are covered under RCM?

Time of Supply shall be earliest of:-

i. the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier

ii. 61st date from the date of issue of invoice

If it is not possible to compute time of supply using above method, the time of supply shall be the date of entry in the books of account of the recipient of supply.

14. Mr. P is a director of ABC Pvt Ltd. On payment of consideration to Mr. P, ABC Pvt Ltd deducts TDS u/s 192 of Income Tax Act (TDS on salary). IS GST chargeable on this amount?

Services provided by Mr. P are in terms of the employment contract. There is employer-employee relationship, which is proved by the fact that TDS is deducted u/s 192. These services will not be considered as supply under GST. Hence, not taxable.

15. Mr. Q is a director of ABC Pvt Ltd. On payment of consideration to Mr. Q, ABC Pvt Ltd deducts TDS u/s 194J of Income Tax Act (TDS on professional fees). Is GST chargeable on this amount?

Services provided by Mr. Q constitute as a supply under GST as there is not employer-employee relationship, which is proved by the fact that TDS is deducted u/s 194J. Consideration received by the director is taxable on RCM basis in the hands of the company.

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