Directors’ remuneration refers to the compensation a company provides to its directors in exchange for their services. This payment may take the form of fees, salary, or the use of company assets.
Before remuneration is disbursed, it must be approved by the shareholders and the Board of Directors. Directors may hold various designations, including Executive Director, Non-Executive Director, Managing Director, Independent Director, Small Shareholder Director, Women Director, Additional Director, or Alternate Director, depending on their role within the company.
The Central Board of Indirect Taxes and Customs (CBIC) clarified the applicability of GST on directors’ remuneration through CGST Circular No. 140/2020, issued on June 10, 2020. This circular provides criteria for determining whether a director qualifies as an employee.
Under GST law, services rendered by an employee to an employer under an employment agreement are not considered a supply of goods or services. Consequently, no GST is applicable in such cases. However, if the director’s services do not fall under an employer-employee relationship, GST is levied on the remuneration. In such instances, the company (the service recipient) must deposit GST under the reverse charge mechanism (RCM) as per Notification No. 13/2017.
GST on Executive Director’s Remuneration
An Executive Director, including Whole-Time Directors and Managing Directors, is a full-time employee responsible for the company’s operations. As per the Companies Act, 2013, the term ‘Whole-Time Director’ has a broad definition, meaning they can receive remuneration both as an employee and in a non-employee capacity. We provide many services like GST registration, GST refund services, GST return filing, & GST Cancellation Services.
When an Executive Director is Considered an Employee
For a director to be classified as an employee, the following conditions must be met:
- Contract of Service: The director’s role aligns with an employer-employee relationship.
- TDS Deduction under Section 192: Tax is deducted under Section 192 of the Income Tax Act, applicable to salaries.
- Accounting Treatment: The remuneration is recorded under the “Salaries” head in the company’s books of accounts.
If any of these conditions are fulfilled, the remuneration paid is exempt from GST.
When an Executive Director is Not Considered an Employee
If a director is not classified as an employee, the following criteria apply:
- Contract for Service: The director’s role is considered professional rather than employment-based.
- TDS Deduction under Section 194J: The remuneration is subject to tax deduction under Section 194J of the Income Tax Act.
- Accounting Treatment: The fees are recorded separately from “Salaries” in the company’s financial records.
If any of these criteria are met, the remuneration paid is subject to 18% GST under the reverse charge mechanism (RCM).
GST on Non-Executive Directors’ Remuneration
Non-Executive Directors do not participate in the daily operations of the company. Instead, they focus on policymaking and strategic decisions.
Since their relationship with the company is classified as a “Contract for Service,” the following rules apply:
- TDS is deducted under Section 194J of the Income Tax Act.
- The remuneration is recorded separately from salaries in the books of accounts.
As a result, GST is applicable on the fees paid to Non-Executive Directors, and the company must discharge GST liability at 18% under the reverse charge mechanism.
GST on Independent Directors’ Fees
Independent Directors provide expert advice to the Board but do not engage in the company’s routine business activities. They must not have been an employee, partner, or proprietor of the company for at least three years before their appointment.
Since Independent Directors are not considered employees, GST applies to their remuneration. The company, as the service recipient, must pay 18% GST under the reverse charge mechanism.
GST Rate on Directors’ Fees
The government has set the GST rate on directors’ remuneration at 18%, which must be paid on a reverse charge basis by the company receiving the services.
Frequently Asked Questions (FAQs)
1. Is GST applicable to all types of directors’ remuneration?
GST is applicable only if the remuneration does not fall under an employer-employee relationship. If the director is an employee, GST is not applicable. Otherwise, GST at 18% is levied under the reverse charge mechanism.
2. How is GST calculated on directors’ remuneration?
If GST applies, the company must pay 18% GST on the total remuneration amount under the reverse charge mechanism (RCM).
3. Do Executive Directors have to pay GST on their salary?
If an Executive Director is classified as an employee and their salary is subject to TDS under Section 192, GST is not applicable. However, if the director is not considered an employee, GST at 18% will apply under RCM.
4. Does a company need to register for GST to pay GST on directors’ remuneration?
Yes, if the company is liable to pay GST under RCM, it must be registered under GST and report the payment in its GST returns.
5. Can directors claim Input Tax Credit (ITC) on GST paid?
No, companies cannot claim Input Tax Credit (ITC) on GST paid under reverse charge for directors’ remuneration.
6. How should a company report GST on directors’ remuneration in GSTR-3B?
The company must report GST liability under Reverse Charge Mechanism (RCM) in Table 3.1 (d) of GSTR-3B and pay the tax in cash.
7. Is GST applicable to Independent Directors’ remuneration?
Yes, Independent Directors’ remuneration is always subject to GST since they do not have an employer-employee relationship with the company.
