The schedule III of the CGST act has spelt out the activities which are neither supply of goods nor services. Such activities are not under the purview of GST. ‘Services by an employee to the employer in the course of his employment’ is one among them. This means – payments made to an employee by his/her employer as per the employment agreement will not attract GST. However, as per Circular No: 140/10/2020 – GST, certain payments made as remuneration to Directors of a Company can attract GST.
Remuneration paid by companies to Independent Directors or Directors who are not employees of the Company
As per the Companies Act, 2013:
- A whole-time Director may be a person who is not an employee of the Company.
- An Independent Director should not be an employee, or proprietor or a partner of the Company.
These provisions clearly state that certain Directors cannot be called employees of the Company. Thus,
- When a Director is not an employee of the Company, the remuneration paid to such Director cannot be considered as payments made on the terms of employment (as salary).
- Furthermore, as per the Income Tax Act, such payments attract TDS under section 194J – TDS on fees for professional or technical services.
Therefore, since these services are not provided by an employee to the employer, they are not covered under the schedule III of the CGST act.
Conclusion: Remuneration paid to Independent Directors or other Directors who are not employees of the Company will attract GST at 18%. However, in this case, the Company will have to discharge the GST liability on the reverse charge basis.
Remuneration paid to whole-time Directors including the Managing Director who are employees of the Company
- Once it is ascertained whether a Director (called by whatever name) is an employee of the Company, it will be relevant to examine whether all the activities performed by such a Director are in the course of employment (as mentioned in the employment agreement’) or not.
- If the remuneration paid to the Director:
- Is classified separately as salaries in the books of accounts of the Company and
- Is subjected to TDS as per the Income Tax Act under section 192 – TDS on payment of salary
the benefit of Schedule III of the CGST Act will be available.
Conclusion: Remuneration paid to Directors who are employees of the Company will not be subjected to GST.
Note: When a Director functions in a dual capacity as an ‘employee’ and ‘Director’, the remuneration paid as salary will not attract GST. However, remuneration paid for services provided as a Director will be taxable. That means, if the below-mentioned conditions are applicable, GST at 18% will be applicable on the relevant part of the remuneration and the Company will be liable to discharge the applicable GST on a reverse charge basis.
- The remuneration paid to the Director is declared separately as ‘Fees for professional or technical services’ in the books of accounts of the Company and
- TDS under section 194J is deducted on the remuneration paid.