Provision of service by an employee to an employer in the course of or in relation to employment has been excluded from the definition of service.
Hence, as long as there is a relationship between an employee & employer & the employee is remunerated by the employer for his services, then such remuneration will not be chargeable to service tax.
However, Service tax is payable on services provided by directors to the company w.e.f. 1-7-2012. Reverse charge provisions have been made applicable to the remuneration paid by company to directors w.e.f. 7-8-2012, making the company liable to pay service tax on such remuneration paid to their directors.
Let us now see the provisions relating to Service Tax on Remuneration paid to Directors by companies in brief:
1. Service tax is payable on services provided by non-executive, nominee and independent directors to the company w.e.f. 1-7-2012. If the director is in full time employment of the company, service tax is not payable. Director may be a Managing Director, wholetime director or executive director.
2. Sometimes remuneration is paid to wholetime director and executive director by way of commission, stock options, performance related bonus etc. and not through monthly salary.
As long as there is employer-employee relation, the mode of payment will not alter the nature of service. Commission may be paid by a company to its directors on the annual results or performance of the company during a year. Such commission is nothing but remuneration paid by an employer to the employee for services rendered to the company This observation has been reflected in CBE&C circular No. 115/09/2009-ST dated 31-7-2009. These provisions hold true even after 01/07/2012.
3. If service tax has to be paid, on what amount should it be calculated in case of Directors?
Directors are paid sitting fees for attending meetings of Board, travelling & conveyance charges and other related charges for attending meetings of Board and Board committees. Thus service tax should be calculated on these payments made to directors. However, it should be noted that mere reimbursement of expenses is not a part of remuneration and service tax would not apply to reimbursements.
4. Liability to pay service tax
As per rule 2(1)(d)(EE) of Service Tax Rules inserted w.e.f. 7-8-2012 and Notification No. 30/2012-ST dated 20-6-2012 amended w.e.f. 7-8-2012, the company receiving the services of directors is liable to pay service tax under reverse charge mechanism.
If the remuneration paid to directors does not cross Rs. 10 Lacs per annum, even then the company would be liable to pay service tax, as the exemption to small-service providers is not available to service receivers who are liable to pay tax under reverse charge mechanism.
In case a director provides services to the company in any other capacity other than as a director, then in such cases, the director would be liable to levy service tax on his own and pay it
5. Utilisation of Cenvat Credit to pay service tax
The company can have sufficient cenvat credit available. However this cenvat credit cannot be used for paying service tax of directors because as per Cenvat Credit Rules, cenvat credit can be utilised for payment of service tax only as a service provider and not as a service receipient. Hence in this case, service tax would have to be paid in cash only.
6. Availability of Cenvat credit of service tax paid under reverse charge
Directors look after the day-to-day working & management of the company. As per Rule 2(1) of Cenvat Credit Rules, input services include services provided in relation to working of factory, office, production, marketing, sales, accounts etc. since all these services are related to day-to-day management of the company, Cenvat Credit can be availed of service tax paid on remuneration to Directors. The GAR-7 challan used to pay service tax can serve as correct document to avail Cenvat Credit.