In these times of a pandemic with morbidity surrounding us, one would expect tax laws to be administered compassionately with revenue authorities not running amok with mystifying interpretations of the GST law, and tax policy to be benevolent.
Indian GST law and regime will soon celebrate its third anniversary yet, controversies on some topics plague the field and cause unwarranted chaos. Unfortunately, cannons of taxation are sacrificed at the altar of revenue collection. An issue that has been overly complicated and subjected to varied interpretations, only to the detriment of taxpayers, is the issue of taxability of compensation paid to directors of an incorporated entity.
There are varied views, and not all of them are accurate. On the one hand are advanced rulings in Alcon Consulting Engineers and Clay Craft, from the States of Karnataka and Rajasthan respectively. It has been ruled (without noticing the different nature of appointments and capacities) that directors are not the employees of the Company and, that the services rendered by directors to a company for which consideration is paid under any head are liable to GST under the reverse charge mechanism (i.e. the company self-pays the tax).
The Rajasthan advance ruling is embellished with the observation that the notification for reverse charge lends a distinct identity to the services provided by a director, more so due to a specific inclusion in the notification. On the other hand, a more recent advance ruling in case of Anil Kumar Agarwal (strangely, from the State of Karnataka) ruled that an executive director supplies services as an employee to the company-employer, consequently remuneration paid to the director will not attract GST.
It further held that remuneration to a non-executive director is liable to GST.
In a utopian world and system (where the flow of credit is seamless and without leakage) payment of and reclaim of GST poses only a cashflow concern for corporate. Yet, there are several businesses including, for example, banks, healthcare organizations, aviation entities that are unable to enjoy complete set-off (credit) of upstream taxes, resultantly non-creditable part of GST constitutes the cost of doing business.
As per our GST law, a supply of services by an employee to an employer is neither supply nor liable to GST. Tax, if applicable to directors’ services, is to be paid under the reverse charge mechanism by the corporate. The moot issue then is whether payments made by a company to its directors will qualify as salary to an employee, and accordingly not attract GST, or will it be taxable under the reverse charge mechanism. Conceptually, the distinction made between the contract of services and contract for services is relevant; an April 2020 judgment of the Supreme Court in Sushilaben Indravadan Gandhi v. The New India Insurance Company Limited exemplifies this concept.
The heart of the issue is whether compensation to different classes of directors of a company, viz. executive and non-executive, whether labeled as managing director, whole-time director, nominated director, independent director are liable for GST. The suggested approach to navigate the question (for the past and going forwards) is by referring to Income tax law and Companies Act (and rules formulated thereunder) in the context of contractual terms.
Considering the form and manner of the contractual arrangement, all payments and compensation that for purposes of corporate income tax law and corporate law is characterized and regarded as being in the nature of salary (i.e. paid to employees), then the treatment under the GST law should be identical; what is sauce for the goose should be sauce for the gander.
Simplistically, if the company records in its books of account compensation to a director as salary, as also withholds income tax under the head for salary, besides undertakes Corporate law compliances with this label, then GST should not apply. This approach is aligned with the view taken by the Tribunal in Allied Blenders and Distillers Private Limited under the service tax regime, and in tune with the position in other VAT / GST jurisdictions.
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