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ANIL KUMAR AGRAWAL

(AAR, Karnataka - Dt. 04.05.2020)

Salary received by director as employee (or executive director) is not subject to GST under reverse charge : AAR Karnataka

"Karnataka Advance Ruling Authority has passed a ruling on 04th May 2020 that the remuneration received by director as employee (or executive director) is not subject to GST under reverse charge, as it is the value of the services supplied by the director being an employee. However, if the director receives remuneration as a Non-Executive Director, such remuneration is liable to GST under reverse charge mechanism under section 9 (3) of the CGST Act 2017, in the hands of the company."

The ruling gives a significant relief specially after the adverse ruling by Rajasthan AAR in the case of Clay Craft India Pvt. Ltd. dated 20.02.2020, in which the Authority ruled that a director can not be the employee of company and cannot avail relief from GST under reverse charge. The said ruling was not logical & practical and majority of the professionals and directors were not convinced with that ruling. 

However, the latest ruling by Karnataka AAR is quite logical & convincing. Para 7.8 of the order read as below. 

"7.8 Salary received as Director from a Private Limited Company : The applicant is in receipt of certain amount termed as salary as Director of a private limited company. Two possibilities may arise with regard to the instant issue of amount received by the applicant. The first possibility that the applicant is the employee of the said company (Executive Director), in which case the services of the applicant as an employee to the employer are neither treated as supply of goods nor as supply of services, in terms of Schedule III of CGST Act 2017.

The second possibility that the applicant is the nominated director (non Executive Director) of the company and provides the services to the said company. In this case the remuneration paid by the company is exigible to GST in the hands of the company under reverse charge mechanism under section 9(3) of the CGST Act 2017, in the hands of the company, under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017.

In the instant case the applicant has not furnished any documentary evidence such as copy of agreement between the applicant and the said private company, copy of appointment order, details of ESI, PF deductions etc., so as to decide whether the applicant is in receipt of salary as an employee or as an independent director. Thus in the absence of any documentary evidence, it is not possible to decide whether the amount received by the applicant is towards his services as an Executive Director or a Non-Executive Director.

In view of the above, the remuneration received by the applicant as Executive Director is not includable in the aggregate turnover, as it is the value of the services supplied by the applicant being an employee. Further if the applicant receives the remuneration as a Non-Executive Director, such remuneration is liable to tax under reverse charge mechanism under section 9 (3) of the CGST Act 2017, in the hands of the company, under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017. Thus the value of the said services of the applicant being a Non-Executive Director are includable in the aggregate turnover, as it is the value of the taxable services supplied by the applicant, though the tax is discharged by the private limited company, under reverse charge mechanism."

Author’s Note
Author believes that there is need of time to establish some harmony and consistency between various state advance ruling authorities, otherwise professionals, taxpayers & goverment machinary will end up wasting so much of their precious time over the litigation on similar issues. Please leave your views on the same in comment box.

Legal validity of the ruling:
We know that, an advance ruling is binding on the applicant only (subject to his rights to appeal). However any advance ruling has a persuasive impact on other paxpayers as well.

Thank you!
Author - Mohit Jain
The Author is FCA with 10+ years experience and founder of TaxReply. The Author has experience of handling GST compliances of multiple countries including India.
 

Click here for full text of order

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