Directors’ remuneration refers to compensation the company gives to its directors for the services rendered. This can be through fees, salary or by use of a company's assets.
The remuneration paid to Directors is issued only on receiving approval from shareholders and the Board of Directors. A director can be executive, non-executive, Managing Director, Independent Director, Small Shareholder Director, Women Director, Additional Director, or Alternate Director depending upon their responsibility towards the company.
CBIC has clarified the applicability of GST on director's remuneration vide CGST circular no. 140/2020 dated 10th June 2020. In the circular, the criteria to classify a director as employee or not is clearly outlined.
As per the GST law, services provided by an employee to the employer in accordance with the employment agreement are neither considered as supply of goods nor supply of services. Hence, GST is not leviable in such cases. However, if the services are not classifiable as employer-employee relationship, then GST is levied on such remuneration. In that case, company (service recipient) will be liable to deposit the GST dues on reverse charge basis with the government as per Notification No. 13/2017.
GST applicability on the remuneration of Executive Director
An Executive Director is a full-time working director of the company/whole-time director/managing director. They have a greater responsibility towards the organisation. The Companies Act, 2013 defines 'whole-time director' to be an inclusive definition. Hence, such director may end up earning remuneration in both the capacities as an employee as well as not an employee.
(1) Where the whole-time director is an employee of the company:
Criteria to be satisfied for the director to be called as 'employee' are as follows:
- Contract of Service: The activities of the director is in the course of employer-employee relation.
- TDS under Section 192 of the Income Tax Act applicable on the salary paid to the director.
- Accounted in the books of accounts under the head 'Salaries'.
If either of the criteria is fulfilled, then GST is not charged on the remuneration paid to the company's executive/whole-time director/managing director.
(2) Where the whole-time director is not an employee of the company:
Circumstances where the director is not classified as 'employee' are as follows:
- Contract for Service: Irrespective of the name and designation of the director, the activities of the director are professional services as a director.
- TDS under Section 194J of the Income Tax Act applicable on the fees/remuneration paid to the director.
- Accounted in the books of accounts under a separate head distinct from 'Salaries'.
If either of the criteria is fulfilled, the services provided by a director to the company is subject to GST at 18% and will fall under the reverse charge mechanism of GST.
GST applicability on the Non-executive Director's Remuneration
Non-executive directors are not involved in the day-to-day working of the company. They are usually involved in planning and policymaking in the best interest of the company.
Further, the relationship is mostly 'Contract for Service', TDS under Section 194J of the Income Tax Act gets attracted on the remuneration/fees paid, which is accounted in the books of accounts separate from the head 'Salaries'.
The services provided by a non-executive director to the company is subject to GST and will fall under the reverse charge mechanism of GST.
GST rate at 18% applies to the total amount of directors’ remuneration.
GST applicability on fees of Independent Director
Independent Directors do not have any direct relationship with the company. They usually give expert advice to the Board of Directors as and when required. They do not take part in the day to day business of the company and are not classified as an employee/partner/proprietor of the company for atleast three years prior to being appointed as an independent director. Hence, GST applies to remuneration paid to Independent Directors.
RCM is applicable, and therefore the company, which is the recipient of services, is liable to pay GST at 18% on the total amount of director's remuneration.