Advance Ruling in the case of Clay Craft India Private Limited, 2020-VIL-86-AAR. In this case, the Applicant sought ruling on the applicability of GST under Reverse Charge Mechanism (‘RCM’) on salary paid to Directors. The facts, decision and our comments on this ruling are detailed below:

Brief Facts

• The Company had various Directors who were working for the Applicant in two capacities:

a.  Whole time Directors: As per Memorandum and Articles of Association of the Applicant, Directors were appointed as full-time employees and were given employee benefits salary, allowances etc. subject to deduction of TDS and PF as per employment contract. All conditions applicable to other employees of the Applicant, were applicable on Directors as well.

b.  Services provider: Directors were also providing certain services to the Applicant for which they were receiving commission.

• Section 9(3) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) read with S. No. 6 of Notification No. 13/2017 – Central Tax (Rate) dated June 28, 2017 (‘Reverse Charge Notification’) levies GST under RCM on services supplied by a Director of Company to said Company.

• Section 7(2)(a) of the CGST Act read with Entry 1 to Schedule III appended to the CGST Act provides that services provided by an employee to the employer in the course of or in relation to the employment, shall neither be treated as supply of goods nor supply of services.

• The Applicant was discharging GST under RCM on commission.

• The Applicant sought ruling on applicability of GST under RCM on salary paid to Directors.

AAR’s Decision

• The Authority for Advance Ruling (‘AAR’) observed that Directors were not employees of the Applicant and their services are not covered under Entry 1 to Schedule III of the CGST Act.

• Consequently, salary paid by the Applicant to its Directors will be subject to GST under RCM.

NITYA Comments:

The decision of AAR is incorrect since it failed to consider the fact that Directors were working in the capacity of employees as well as evidences relied upon by the Applicant in support of its contention.

It is a settled principle that a person can act in two different capacities and taxability of each capacity needs to be seen distinctly. In this case, Directors were concurrently acting as employees as well as service providers. Salary paid by the Applicant for employer-employee relationship with Directors was clearly outside the purview of GST law vide Entry 1 to Schedule III appended to the CGST Act.

Under Service Tax law as well, services received by a Company from its Directors were subject to Service Tax under RCM. An identical dispute was raised by the authorities seeking to bring salaries paid to Directors under the ambit of Service Tax. Tribunal consistently held that Service Tax is not leviable on services provided by Directors who are employees of the Company. The Tribunal gave due importance to Income Tax treatment adopted by the Company (deduction of TDS under salary head), compliances under labour laws (like deposition of PF) etc. while rendering its decisions.

Basis above, a Company is not required to pay GST on salaries and other allowances paid to Directors in their employee capacity. GST under RCM is applicable only on services of Directors to the extent they do not act as employee.