The Goods and Services Tax (GST) is a comprehensive indirect tax that was implemented in India on July 1, 2017. The GST law applies to all supplies of goods and services made for a consideration in the course or furtherance of business. The applicability of Goods and Services Tax (GST) to remuneration paid to directors has been a topic of confusion and debate among businesses in India. In an attempt to provide clarity, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 140/10/2020-GST on 10th June 2020. The circular outlines specific criteria to determine whether GST should be levied on remuneration paid to directors. In this article, we will simplify the circular’s content and provide a comprehensive understanding of the factors that govern the GST applicability in such cases.
Remuneration paid to directors is a supply of services and is therefore subject to GST. However, the GST implications of remuneration paid to directors vary depending on the nature of the director and the services provided.
Independent Directors
Independent directors are directors who are not related to the company and who are not involved in the day-to-day management of the company. Remuneration paid to independent directors is subject to GST on a reverse charge basis. This means that the company, as the recipient of the services, is liable to pay GST to the government. The GST rate applicable to remuneration paid to independent directors is 18%.
Non-Executive Directors
Non-executive directors are directors who are not involved in the day-to-day management of the company, but who are related to the company. Remuneration paid to non-executive directors is also subject to GST on a reverse charge basis. The GST rate applicable to remuneration paid to non-executive directors is 18%.
Executive Directors
Executive directors are directors who are involved in the day-to-day management of the company. Remuneration paid to executive directors is not subject to GST. This is because executive directors are considered to be employees of the company and their remuneration is treated as salary. Salary is not a taxable supply under GST.
Sitting Fees
Sitting fees are fees paid to directors for attending board meetings. Sitting fees are subject to GST on a reverse charge basis. The GST rate applicable to sitting fees is 18%.
Other Remuneration Subject to TDS
Remuneration, fees, or commissions declared separately in the company’s books, other than “salaries,” and subject to TDS under Section 194J, are liable for GST under the reverse charge mechanism. The recipient of these services, i.e., the company or body corporate, is responsible for discharging the GST.
Services Provided by Directors in Different Capacities
GST under the reverse charge mechanism is only applicable when directors provide services in their capacity as directors and not in any other individual capacity. For instance, services such as renting commercial premises to the company, professional services requiring qualifications, sale of goods, or commission paid for inducing investments are subject to GST under the forward charge mechanism if the director crosses the threshold limit of aggregate turnover for GST registration.
TDS on Remuneration Paid to Directors
The government has also introduced a TDS (tax deducted at source) on remuneration paid to directors. The TDS rate is 10% for independent directors and 20% for non-executive directors. The TDS is to be deducted by the company and deposited with the government.
The GST implications of remuneration paid to directors in India are complex. The GST rate, the liability to pay GST, and the TDS rate all vary depending on the nature of the director and the services provided. It is important for companies to understand the GST implications of remuneration paid to directors in order to comply with the law and avoid penalties. The circular issued by the CBIC provides clarity on the GST applicability to remuneration paid to directors. Understanding the categorization of directors as independent, non-executive, or executive, and the nature of the remuneration is crucial in determining whether GST is applicable. It is advisable for businesses to refer to the circular and consult with tax professionals to ensure compliance with GST regulations.
