NITYA Outlook | Issue 146 | GST implication of services provided by Directors
Service supplied by Director of Company to said Company is notified under Reverse Charge Mechanism (‘RCM’) on which tax is payable by recipient i.e. Company. Recently, CBIC issued clarification on scope of said RCM entry.
Vide this Outlook, we intend to update you about GST implications that may arise on various categories of services supplied by Directors to Company.
Employment & other services provided in capacity of Director
- Under GST law, services provided by an employee to employer in the course of or in relation to employment are not treated as supply of services. However, if Directors provide services in capacity other than as an employee, GST is leviable. In latter cases, Company (being service recipient) needs to deposit GST under RCM. Above legal position was also clarified by CBIC vide Circular No. 140/10/2020-GST dated June 10, 2020 (‘Circular 140’) as under:
|Type of Director||Nature of payment||Implications under Income Tax||GST Implications|
|Director who is an employee (irrespective of name and designation)||
Salary for employment
(declared as salary in books of accounts)
|TDS deducted under Section 192 of the Income Tax Act, 1961 (‘IT Act’)||No GST payable|
Remuneration for service (e.g. sitting fee etc.)
[Director can act in dual capacity including as a service provider]
|TDS deducted under Section 194J of the IT Act||GST payable by Company under RCM|
|Independent Director or Whole-Time Director who is not an employee||Remuneration for service||TDS deducted under Section 194J of the IT Act||GST payable by Company under RCM|
Services provided in capacity other than of Director
- Circular 140 did not deal with taxability of other services provided by Directors in their personal capacity leading to confusion in mind of taxpayers.
- Recently, CBIC vide Circular No. 201/13/2023-GST dated August 1, 2023 (‘Circular 201’) clarified that RCM will only apply to services provided in capacity of Director. Accordingly, services supplied by Director in private or personal capacity such as renting of immovable property to Company, will not be covered under RCM.
- It is pertinent to note that effective July 18, 2022, RCM is applicable to renting of residential property to Company (irrespective whether Landlord is Director or not).
- Consequently, on professional or other services provided by Director to Company in capacity other than Director, Director will be liable to pay GST on FCM basis.
NITYA Comments: Basis Circular 201, Revenue may demand GST under FCM from Directors rendering personal/professional services to Company (not in capacity of Director) for past period even where Company deposited tax under RCM. Further, Revenue may deny ITC to Company alleging that it wrongly discharged tax under RCM. In our view, once Company has deposited tax, both these objections can be defended basis sufficient favorable jurisprudence on identical issues under erstwhile regime.
Guarantee given by Director
- Directors often provide guarantee on behalf of Company to Banks for facilitating loans & overdraft facility to Company. This is in line with RBI Master Circular – Guarantees and Co-acceptances dated November 9, 2021 (‘RBI Circular’) under which Banks take personal guarantees of Directors for granting credit facilities to Companies.
- It is pertinent to note that RBI Circular bars payment of any consideration to Directors for providing such guarantee. Consequently, Directors cannot recover any amount from Company for providing such guarantee.
- In absence of consideration in these activities, these transactions qualify as ‘supply’ and are exigible to GST only if Director and Company qualify as ‘related persons’ under GST Law.
- Explanation to Section 15 of the CGST Act defines criterion for treating two parties as related persons. Director and Company will qualify as related persons only if Director controls affairs of Company or owns/controls/holds minimum 25% shareholding in Company or qualifies as an employee of Company. In such scenarios, Director will be liable to pay GST under FCM. However, in absence of satisfaction of any of these criterion, Director and Company will not qualify as related persons nor there will be any implications under GST Law in absence of consideration.
- This concept will equally apply to other services provided by Director on FOC basis. In such cases, GST implications will arise only if Director qualifies as related person of Company.
NITYA Comments: In most cases, such transactions will not be exigible to GST due to absence of supply. However, if Director and Company qualify as related persons, GST will be applicable. It is pertinent to note that where Company is eligible to avail full ITC, GST can also be paid based on nominal value under second proviso to Rule 28 of the CGST Rules. Such value will be deemed as assessable value.
In view of above, taxability and applicability of RCM on services by Director to Company is summarized as under:
|Nature of payment||GST Implications|
|Remuneration for service||
No GST payable if under employment contract
GST payable by Company under RCM on services not under employment contract such as sitting fees etc. (Refer Table above)
|Services provided in professional capacity (CA, Engineer, Architect etc.)||GST payable by Director under FCM|
|Services provided in personal capacity (other than renting of residential dwelling)||
GST payable by Director under FCM
|Renting of residential dwelling by Director||GST payable by Company under RCM|
|Guarantee given on behalf of Company||
If Director qualifies as related person of Company – GST payable by Director under FCM
If Director does not qualify as related person of Company – GST not payable in absence of consideration