13. Service provided by Director to Company or body corporate
Supplier :- A director of a company or body corporate
Recipient :- The company or body corporate located in a taxable territory
One of the most debated entries under the Reverse Charge Mechanism (RCM) is Entry No. 6 of Notification No. 13/2017-Central Tax (Rate). This entry covers services supplied by a director of a company or a body corporate to the said company or body corporate. The tax liability in such cases is on the recipient company, not on the director.
A significant controversy arose following the advance ruling of the Karnataka Authority for Advance Rulings in the case of M/s Alcon Consulting Engineers (India) Pvt Ltd, where it was held that remuneration paid to a director is subject to GST under RCM, thereby causing widespread concern among companies.
In the author's opinion, the blanket application of this ruling to all director remunerations is not legally sustainable. A more nuanced approach is required, drawing upon interpretations from the Companies Act, Income Tax Act, and GST law, particularly Schedule III of the CGST Act.
Director as Executive vs Non-Executive
Under the Companies Act, 2013, a director may be:
An executive director, who generally functions as an employee of the company.
A non-executive director, who does not act in an employment capacity.
In income tax law :-
TDS under Section 192 (salary) is applicable when a director is in an employer-employee relationship (typically, executive directors).
TDS under Section 194J (professional services) is applicable when the director is not considered an employee (non-executive or independent directors).
GST Position - CBIC Clarification
The CBIC has clarified this issue in Circular No. 140/10/2020-GST dated 10.06.2020, which states:
If remuneration is paid to a director as salary, and TDS is deducted under Section 192, the director is treated as an employee. Such services fall under Entry 1 of Schedule III to the CGST Act, which excludes services by an employee to the employer from the scope of GST then No GST is payable under RCM in this case.
If remuneration (such as sitting fees or commission) is paid to a director, and TDS is deducted under Section 194J, it is not in the nature of employment. then GST is payable under RCM by the company at 18%.
Question of Nature of Services - Only in the Capacity as Director?
A related debate is whether all services provided by a director to a company are covered under RCM, or only those services rendered by the individual in his/her capacity as a director.
The wording of Entry No. 6 does not expressly limit the type of services
- it simply mentions "services supplied by a director." However, this raises the following interpretational challenge :-
If a director rents out an immovable property to the company, does that service attract RCM merely because the supplier happens to be a director ?
To answer this, we draw a parallel with other RCM entries :- Entry 7 :- Services by an insurance agent to an insurance company.
Entry 8 :- Services by a recovery agent to a bank or financial institution.
In both these entries, the nature of the service is not explicitly defined, yet it is understood that only services provided in the specified capacity (as insurance/recovery agents) are covered.
Applying the same logic :-
Only services provided by a director in the capacity of a director should be covered under RCM.
Other services (like renting property, selling goods, etc.) should be treated as regular taxable supplies under forward charge, not RCM.
Additional Technical Support - Breakage of ITC Chain
If all services supplied by a director to a company are covered under RCM - including services like renting of immovable property - it would lead to unintended consequences :-
Such services become exempt for the director, under Section 17(3) of the CGST Act (where the recipient pays tax under RCM, and the supplier is not liable).
Consequently, the director will not be able to avail Input Tax Credit (ITC) on inputs and input services used to provide that exempt supply.
This results in a breakage of ITC chain, which goes against the objective of seamless credit flow under GST.
Author's Opinion
Two interpretations are possible:
Literal interpretation: All services provided by a director, regardless of their nature, are covered under RCM.
Purposive interpretation: Only services rendered in the capacity as a director are covered under RCM; all other supplies follow the regular forward charge mechanism.
The author is inclined toward the second view, as it aligns with the spirit of GST, avoids breaking the ITC chain, and is consistent with interpretations of other similar RCM entries.
Examples :-
Example 1 :- Executive Director Receiving Salary
Mr. A is an executive director drawing monthly salary from ABC Pvt. Ltd. TDS is deducted under Section 192.
No GST is applicable, as this is a service by an employee to employer under Schedule III.
Example 2 :- Non-Executive Director Receiving Sitting Fees
Ms. B is a non-executive director receiving Rs. 1,00,000 as sitting fees. TDS is deducted under Section 194J.
GST @18% is payable by the company under RCM.
Example 3 :- Director Renting Property to the Company
Mr. C, a director of XYZ Ltd., lets out commercial property to the company.This is a rental service, not provided in the capacity as a director.
GST should apply under forward charge, and Mr. C must charge GST if registered.