This article is written by Amarnath who is pursuing a Certificate Course in Goods and Services Tax (GST) from LawSikho.

Introduction

Section 7(1) of the Central Goods and Services Act, 2017 (Act for short) seeks to enumerate the meaning of scope of supply and mentions many activities and transactions which would amount to supply. Section 7(2) of the Act provides that notwithstanding anything contained in section 7(1), the activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor a supply of services. Entry 1 in Schedule III mentions the services by an employee to the employer in the course of or in relation to his employment. 

Hence, if any employee is paid salary, GST is not leviable on the same. However, a doubt arose as to whether remuneration paid to the director would be subject to GST. This was because the notification was issued by the Central Government under the Reverse charge mechanism.

Reverse Charge Notification-13/2017

Section 9(3) of the Act provides that the Government may, on the recommendation of the GST council, by notification specify categories of supply of goods or services, the tax on which shall be paid on a reverse charge basis by the recipient of such goods or services or both. In furtherance of these powers, the government issued the Notification No. 13/2017- Central Tax (Rate) on 28.06.2017 (https://www.cbic.gov.in/resources/htdocs-cbec/gst/Notification13-CGST.pdf ). In entry 6 thereof, the director of a company or a body corporate was stated to be a supplier and the company or the body corporate was stated to be the recipient and the category of service was stated to be services supplied by a director of a company or a body corporate to the said company or body corporate. Hence, GST was applicable on those services with the same being the liability of the company to pay it.

CBIC Circular

This situation led to various doubts and many references from the trade and industry were made to the Central Board of Indirect Taxes (CBIC for short) seeking clarifications as to which of the two provisions were applicable in respect to services rendered by the directors to the company. The GST Policy Wing of the CBIC in this regard issued a circular on 10.06.2020 in Circular No: 140/10/2020 – GST (CBEC-20/10/05/2020 –GST) (https://www.cbic.gov.in/resources//htdocs-cbec/gst/Circular_Refund_140_10_2020.pdf;jsessionid=27EC4EF7AB0A0DBD994BEECC7924A4E9 ).

Treatment of the issue by the CBIC Circular

The CBIC sought to deal with the situation under two categories. The first category was that of the services rendered by the independent directors or directors who were not the employees of the company. The second category was that of the services rendered by the whole time directors included managing directors of the company who were the employees of the company.

The CBIC primarily began with the question whether a director could be called an employee of the company. It held that section 2(94) of the Companies Act, 2013 which defines a whole time director is an inclusive definition and it may include a person who may not be an employee of the company.

Impact on independent directors

In respect to the independent directors, the CBIC referred to the definition of the independent directors as held under section 149(6) of the Companies Act read with rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 and held that those provisions made it amply clear that the independent director was not an employee of the company for the immediately preceding three years prior to which he was proposed to be appointed as such in the said company.

The CBIC then came to the conclusion that the independent director is not an employee and cannot be held to be coming within entry 1 of Schedule III. The CBIC concluded that in respect of the independent directors, GST is payable by the company on a reverse charge mechanism by virtue of entry 6 of the notification No.13/2017 Central Tax-Rate.

Impact on employee-director

With respect to a director who has been ascertained as an employee, the CBIC stated that the position would be the same irrespective of the name and designation of such directorship i.e., managing director or whole-time director. On the other hand, the CBIC sought to differentiate between the activities of the director which are performed in the course of the employer-employee relationship (i.e., a contract of service) and the activities, if any, containing an element of contract for service. The circular makes a reference that there are several cases wherein it has been held that the director may be working in dual capacities i.e., in a capacity of a director and the other in the capacity of a contractual relationship of master and servant with the company (employment). 

CBIC circular then makes a reference to the provisions of the Income Tax Act, 1961 dealing with TDS. The circular mentions the difference in TDS when done under section 192 for the purpose of remuneration in the nature of salary paid to the director and under section 194J for the purpose of remuneration in the nature of professional fees. Hence, it was concluded that when remuneration was paid under section 192 as salary, the same was not liable to GST as it was paid in the employee-employer relationship. If however the remuneration was paid as Fees for Professional or Technical Services and TDS was under section 194J, the same would be subject to the GST and the company would be liable to pay the GST under reverse charge as per notification No.13/2017 Central Tax (Rate) dated 28.06.2017.

Case laws 

Though the CBIC in its circular has stated that several courts have held that the director can act in dual capacities, i.e., as an employee and also as a director, it has not referred to any specific decisions. Even in respect of reference to TDS provisions, it has not given specific examples. Hence an attempt is made hereunder to look at a few specific decisions and provisions for ascertaining the correctness of the statements made in the circular.

Section 149(6) of the Companies Act, 2013 gives many requirements for a person to be an independent director which includes him not being an employee for the previous three financial years. Hence, any service he renders to the company cannot come within Schedule III. Every payment to a non-employee director is subject to TDS under section 194J of the Indian Income Tax Act, 1961 and is subject to GST also on a reverse charge mechanism.

In the case of Employees State Insurance Corporation vs. Apex Engineering Pvt Ltd reported in (1998)1SCC86, the Hon’ble Supreme Court of India held that, in the context of the ESI Act, that a managing director could be both a principal employer under that Act as well as an employee and hence upheld the dual capacity of a director. The Hon’ble court referred to many decisions including Lee vs. Lee’s Farming Ltd (1961 AC 12) and the case of Bolting vs. Cinematograph Association etc., (1963) 1 All ER 716. In the case of Lee vs. Lee’s Farming Ltd, the director of the company was also working as an employee (pilot) of the company.

The director was killed during the course of employment and his wife sought compensation under the New Zealand’s Workmen’s Compensation Act which was resisted by the authorities on the ground that the deceased was a director and not an employee. The court held that “”Ex facie there was a contract of service. Their Lordships conclude, therefore, that the real issue in the case is whether the position of the deceased as sole governing director made it impossible for him to be the servant of the respondent company in the capacity of chief pilot of that company. In their Lordships’ view, for the reasons which have been indicated, there was no such impossibility. The respondent company and the deceased were separate legal entities, Their Lordships consider, therefore, that the deceased was a worker.”

In Ram Pershad v. Commissioner of Income Tax, New Delhi MANU/SC/0330/1972 : [1972]86ITR122(SC), the Hon’ble Supreme Court held that a Managing Director may have a dual capacity i.e., he may be both, a Director as well as an Employee.

Thus a director can be both a director and an employee. Hence he can be paid as an employee as well as for other services. In respect of payments to directors like sitting fees, TDS is under section 194J and is subject to GST. But if salary is paid, TDS is under section 192 and is not subject to GST. Hence, it can be seen that the circular issued by CBIC has considered all relevant points before coming to the finding.

Conclusion

The reasoning and the conclusion adopted by the CBIC in its circular is unimpeachable. It has harmoniously reconciled Notification No.13/2017 with Schedule III by relying upon the practice adopted by the companies themselves under the Income Tax Act, 1961. It has removed all doubts as to the course of action to be taken either by the assessee or by the tax officials. Hence, it can be said the CBIC through its circular has smoothened the process of compliance and tax collection to the benefit of all.

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