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GST on Directors' Salary : End of litigation by CBIC

(Circular No. 140/2020 dated 10.06.2020)

Finally after multiple contradictory rulings by various authorities, CBIC has come up with the circular clarifying the GST treatment on Director's Salary. The said clarification is quite logical and clearly distinguish the amount received by directors in the capacity of director and employee. 

There has been a lot of anxiety and confusion among directors and companies, specially after some of the recent adverse rulings by authorities such as in the case of Clay Craft India Pvt Ltd. by AAR, Rajasthan and Alcon Consulting Engineers (India) Pvt Ltd. by AAR, Karnataka.

But today CBIC has issued Circular No. 140/2020 dated 10.06.2020 clarifying the GST treatment on Director's Salary. Below is the gist of circular in simple words.

GST on Salary of Directors who are not employees of company.

In respect of directors who are not the employees of the said company, the services provided by them to the Company, in lieu of remuneration as the consideration for the said services, are clearly outside the scope of Schedule III of the CGST Act and are therefore taxable in GST.

Accordingly, it is clarified that the remuneration paid to independent directors, or those directors (by whatever name called, who are not employees of the said company) is taxable under GST in hands of the company under reverse charge mechanism.

GST on Salary of Directors who are also the employees of company.

Once, it has been ascertained whether a director, irrespective of name and designation, is an employee, it would be pertinent to examine whether all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service”) or is there any element of “contract for service”.

A director who has also taken an employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other on the basis of the contractual relationship of master and servant with the company, i.e. under a contract of service (employment) entered into with the company.

Accordingly, it is clarified that the part of Director's remuneration which are declared as "Salaries" in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable under GST being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.

It is further clarified that the part of Director's remuneration which is declared separately other than "salaries" in the Company's accounts and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services shall be taxable under GST and thus would be liable to GST under reverse charge.

For more details, please read full circular of CBIC.

This notification is contrary to the the provisions of the Income Tax Act. Because under the income-tax act any payment to an employee by whatever name called (e.g. commission, Professional fee, service charges etc.) shall be taxable as salary u/s 192 of the income tax act 1961. Further if the employer employee relationship is established than all the payments by whatever name called ( e.g. commission, Professional fee, service charges etc.) are taxable u/s 192 only. It means is such cases nothing shall be taxable u/s 194J etc. , hence the question of levying of GST would not arise on director's remuneration working in multiple capacities.

As far as GST audit is concerned that the respective gst authority had served SCN to the taxpayers to pay GST @18% being the remuneration received by the directors without considering circular 140/2020 .

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