AAR Update | GST on incomes of Director and Partner

by | May 12, 2020 | Insight

This is to apprise you on a recent decision of Authority for Advance Ruling, Karnataka (‘AAR’) in the case of Anil Kumar Agrawal, 2020-VIL-118-AAR. The Applicant sought ruling on includability of the following incomes in ‘aggregate turnover’ under Section 2(6) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’):

  1. Salary received as a Director of a Company; and
  2. Salary received as a Partner of a Partnership Firm.

Section 2(6) of the CGST Act provides that ‘aggregate turnover’ inter alia includes value of all taxable supplies (excluding inward reverse charge supplies) and exempt supplies. Basis this provision, the AAR observed that only income arising out of an activity constituting supply under Section 7 of the CGST Act will become part of ‘aggregate turnover’.

Based on the above background, the Authority determined the questions as follows: 

1. Salary received as a Director of a Company: 

  • The AAR categorized salary earned as a Director of a Company into two categories and held as under:
  • Executive Director: Service of Executive Director (Whole-Time Director) to Company is rendered in the capacity of an employee. This is squarely covered under Clause 1 of Schedule III of the CGST Act and hence, neither qualifies as supply of goods nor as supply of service. Thus, such income will not be included in the aggregate turnover.
  • Non-Executive Director: Remuneration received as Non-Executive Director constitutes to be supply and is covered under Reverse Charge Notification [Entry No. 6 of Notification No. 13/2017 – Central Tax (Rate) dated June 28, 2017] being a service provided by Director to Body Corporate. Being outward reverse charge supply, such income will be included in the aggregate turnover.

2. Salary received as a Partner of a Partnership Firm:

  • Salary received as a Partner of a Partnership Firm, is covered under Clause 1 of Schedule III of the CGST Act i.e. as service by an employee to employer and is neither a supply of goods nor supply of services.
  • Share of profit received as a Partner of a Partnership Firm, is mere appropriation of money which does not qualify as supply under Section 7 of the CGST Act.
  • Hence, the amounts received by Applicant as a Partner of a Partnership Firm will not attract GST nor will they be included in aggregate turnover.

NITYA Comments:

 This Ruling laid down correct position of law that the services provided by a Director as an employee of a Company, is not exigible to GST. This ruling is contrary to ruling in the case of Clay Craft India Private Limited, 2020-VIL-86-AAR (update on the Ruling is attached in trail mail for ready reference).

 This Ruling is incorrect as far as it holds that salary earned by Partner of a Partnership Firm is covered under Clause 1 of Schedule III of the CGST Act. This is because a Partner of a Partnership Firm is not an employee and allowance of salary to such Partner is nothing but appropriation of money. Hence, the same should be at par with share of profit of the Partner.

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