External directors liable to pay GST: CBIC

The Central Board of Indirect Taxes and Customs (CBIC) on Wednesday clarified that remuneration to directors — whatever name they are referred to as (independent directors or whole time directors) — would attract goods and services tax (GST) in case they are not employees of the concerned companies. GST will be imposed on them on a reverse charge mechanism (RCM). This way, CBIC has settled an ongoing controversy related to the matter due to conflicting rulings by the authority for advance rulings (AARS).

Normally, a person or entity providing services pays tax to the exchequer, and recovers it from the receiver of the service.

But under RCM, the receiver of the service pays the tax by deducting it from the service provider’s compensation. In case they are employees of companies, part of their remuneration would draw GST, while the other part will not attract it. The CBIC relied on the Income Tax Act for the purpose of GST.

While independent directors have to be from outside the company concerned, the whole-time directors could be company employees or those rendering services from outside.

It said part of the employee directors’ income, which is declared as salary in the books of companies concerned and tax is deducted at source (TDS) under Section 192 of the I-T Act, would not draw GST. However, that part which is declared as “other than salaries” and TDS is imposed under Section 194 (j) would draw GST. This remuneration would be treated as fees for professional or technical services.

The clarification came amid contradictory rulings of the authorities for advance rulings (AARS).

Amit Maheshwari, managing partner at Ashok Maheshwary & Associates, said, “We were seeing contradictory AAR rulings on this matter and there was confusion in the minds of taxpayers on how to treat director remuneration. Linking it with the treatment under the I-T Act would result in consistency across both the laws, providing more certainty to tax payers.”

Abhishek Jain, partner, EY, said this clarification was sought for most businesses, especially on account of the contrary advance rulings and potential impact for businesses.

Earlier, the Karantaka AAR had ruled that remuneration of executive directors are not liable to GST since he is an employee of the company. It said

non-executive directors will pay GST through RCM.

The order has stirred a controversy as other state AARS held that all directors are liable to pay GST.

In the case related to Clay Craft, the Rajasthan AAR had ruled that the services rendered by a director to a company for which consideration is paid to him under any head is liable for GST under RCM. The situation would remain the same even when the director is a part-time director in another company. The AAR did not distinguish between executive director and non-executive director as was done by its Karnataka counterpart.

In a case relating to ALCON Consulting Engineers (India), the Karnataka AAR, in 2017, had also ruled that the consideration paid to a director in the form of remuneration is in relation to services provided by him or her to the company.

Thus, the company is required to pay GST under RCM on remuneration paid to the director, it had held.