The litigation as regards liability of the company to pay tax under reverse charge mechanism on payments made to its directors is not new and is continuing from the erstwhile service tax regime. The legacy has been travelled into the GST regime and various pronouncements rendered by Authority for Advance Rulings are instigating the fire of litigation in the GST era too. The present update seeks to discuss the recent Advance Ruling pronounced in the case of M/s Clay Craft India Pvt. Ltd. vide Order No. RAJ/AAR/2019-20/33 dated 20.02.2020 on the applicability of GST under reverse charge mechanism on remuneration paid to directors by a company. It is pertinent to mention that this is not the first decision wherein such adverse view has been taken. Similar view was already taken by the Authority of Advance Ruling Karnataka in the case of M/s Alcon Consulting Engineers (I) Pvt. Ltd. reported as [2019 (30) G.S.T.L. 678 (A.A.R.-GST)].
In view of various queries being received by the assessees on the issue of payment of GST by the companies to payments made to its directors under reverse charge mechanism, the applicant filed advance ruling before the Rajasthan AAR for decision on the said issue. It was pleaded that the director of the company is in-charge of managing various day to day affairs of the company such as production, despatch, quality checks , accounting etc. and are being paid remuneration which is being reflected by the directors under their “Income from Salary head” in the Income Tax Returns and on which TDS is also being deducted under section 192 of the Income Tax Act. Moreover, all the statutory obligations such as deduction of EPF was being done by the company which indicated the relationship of employer-employee between the director and the company. It was contended that as the services provided by an employee to his employer are covered under clause I of Schedule III, the said activity is neither supply of goods nor supply of services so as to attract levy of GST. The definition of ‘employer’ in general parlance along with reference to various provisions under Companies Act, Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 was made so as to justify that there was employer-employee relationship between the company and its directors.
However, the Hon’ble Rajasthan Authority for Advance Ruling, without discussing in detail the reference made to various provisions relied upon by the applicant under various Acts, held that the directors are not employee of the company and so are not covered by clause (1) of Schedule III to the CGST Act, 2017. Consequently, the company is liable to pay GST under reverse charge mechanism on the remuneration paid to its director in terms of serial no. 6 of the Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017.
It is pertinent to mention that the above decision has been rendered without considering the fact that the remuneration paid to directors is considered as “salary” under the Income Tax Laws. It is submitted that it is settled principle that if Income Tax Department, a branch of Ministry of Finance has held the amount paid to director as salary, then the GST department, another branch of Finance Ministry cannot take a contrary stand. In this respect, reference may be made to decision given in the case of Rent Works India Pvt. Ltd. Vs Commissioner of C.Ex., Mumbai-V [2016 (43) S.T.R. 634 (TRI.-MUM)]. It is submitted that in the erstwhile service tax regime, it was held that when it is established by the company that the remuneration paid to directors is actually salary which is fortified by the Form-16 depicting TDS deduction under salary head under Income Tax Act and other compliances such as deduction of Professional Tax, EPF etc. indicate that directors are employees, then no service tax was payable by the company under reverse charge mechanism. Reference may be made to decision given in the case of M/s Allied Blenders and Distillers Pvt. Ltd. Vs CCE & ST, Aurangabad [2019 (24) G.S.T.L. 207 (TRI.-MUMBAI)]. Therefore, when the company has proved that obligations under various Acts indicate that the directors are employees of the company, a contrary stand cannot be taken by the GST department so as to fasten the liability to pay GST under reverse charge mechanism. Hence, in our opinion, the company is liable to pay GST under reverse charge mechanism only commission, rent etc. paid to directors which are consideration for various services rendered by directors other than their capacity of employees. Therefore, the above decisions pronounced by AAR’s will surely be reviewed by higher authorities in the days to come. Here it is worthwhile to mention that the decision of Advance Ruling is binding only on person seeking the same and it is not binding on other taxpayers.