Taxability of Service by Directors

Taxability of services provided by a director

In GST, provisions relating to Authority of Advance Rulings (“AAR”) were enabled to provide certain aid to the taxpayers with respect to unerring interpretation of the legal provisions. However, with flooding of pro-revenue and certain implausible rulings, it appears that AARs are failing time and again to serve the purpose of their establishment. One such occasion, which further raises the doubts of their credibility is the ruling of Rajasthan AAR in the application made by Clay Craft Private Limited.

Question before AAR

The issue for consideration before AAR was to analyze the RCM applicability on the salary paid to the whole-time directors, who were serving as employees of the company. The Company was deducting the EPF from their salaries and all other policies and benefits to them were given as per the policy decided by the company for their employees. The company was already discharging GST under RCM on other services received from such directors.

Ruling and observations

The Rajasthan AAR observed that consideration paid to the Directors is against the supply of services provided by them to the applicant company and are not covered under clause (1) of the Schedule III to the CGST Act as the directors are not the employees of the Company. In such a case, the director is the supplier of services and the company is the recipient of the services. Therefore, it is very clear that the services rendered by the directors to the company for which consideration is paid to them in any head are liable to pay GST under RCM. Notification No. 13/2017- Central Tax (Rate) has given the distinct identity to the services provided by the director and specifically included in the category of service on which GST will be payable under RCM.

Issues arising from AAR

The above discussed AAR has raised a panic amongst taxpayers with respect to taxability of these services and casts a doubt with respect to following questions-

• Whether employer-employee transactions can be taxed under GST if such an employee is a director?

• Whetheractivities performed by a director against salary constitutes as a supply at all?

• Whether salary is in the nature of consideration for a supply ?

• Whetherthere is a difference between taxability of different types of directors e.g.- managing, independent, executive, non-executive, nominee directors?

• Whether RCM notification can go beyond Section 7 of the CGST Act to apply on the transactions which are otherwise not taxable?

Before trying to attempt these questions, it is pertinent to go through the relevant provisions of the GST law.

Provisions under GST

Services provided by employee in course of his employment

Section 7(1) of the CGST Act, 2017provides for inclusive definition of the supply such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Section 7(2) of the CGST Act provides for activities or transactions which would be treated neither as a supply of goods nor a supply of services. Schedule III specifies such activities and includes “services by an employee to the employer in the course of or in relation to his employment” in its ambit. Therefore, such activities cannot be considered as supply so as to be leviable to GST.

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