GST on company directors’ pay: CBIC brings income tax into mix; GST levy will depend on this TDS rule

The CBIC on 10 June 2020 issued a Circular clarifying that Director’s remuneration shall be taxable only to the extent the remuneration is outside the terms of employment.

The Central Board of Indirect Taxes & Customs (‘CBIC’) has finally put to rest the huge hustle created by the contrary rulings of Advance Ruling Authorities (‘ARA’) on the levy of GST on remuneration paid to Directors of a company.  The CBIC on 10 June 2020 issued a Circular clarifying that Director’s remuneration shall be taxable only to the extent the remuneration is outside the terms of employment.  Any amount paid in the course of employment would be outside the scope of levy by virtue of Schedule III to the GST Act.

A huge controversy was stirred earlier this financial year, after ARA, Rajasthan in the case of M/s Clay Craft India Private Limited held that Directors cannot be treated as employees of a company and thus, all kinds of remuneration paid to them shall be leviable to GST.  The controversy was further stoked when ARA, Karnataka held a contrary view by holding that all remuneration paid to Directors cannot be said to be leviable to GST.  Remuneration to Executive Directors would be outside the scope of GST since there exists an employer-employee relationship between the company and the Directors whereas, the remuneration paid to Non-Executive Directors shall be leviable to GST in the hands of the company under reverse charge mechanism.  The contrary judgements by different ARA’s pushed the industries into a quandary with respect to the levy of GST on the remuneration paid and a clarification in this regard was much awaited.

The Circular issued by the CBIC has interestingly intertwined the Income Tax Act and the GST provisions in order to determine the levy of GST on remuneration paid to Directors.  Reference is drawn to the TDS provisions under the Income Tax Act, 1961, wherein ‘TDS under salaries’ is deducted under Section 192 of the said Act and ‘TDS under professional fees’ is deducted under Section 194J of the said Act.  It has been clarified that the litmus test to determine whether GST is to be levied on the remuneration shall depend on the Section under which TDS is deducted under the Income Tax Act.  If TDS is deducted under Section 192, the remuneration paid shall be categorised as salaries, and thus, outside GST levy.  On the other hand, if TDS is deducted under Section 194J, the remuneration cannot be said to be in the course of employment and hence, chargeable to GST in the hands of the company under reverse charge mechanism.

In light of the confusion created by the contrary rulings of the Advance Ruling Authorities and the potential impact of such transactions, the Circular comes as a huge relief to taxpayers across the country.  The Circular puts to rest the possibility of a chain of potential litigations in future.

  • Gunjan Prabhakaran is Partner & Leader — Indirect Tax, BDO India. Views expressed are the author’s own.

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