Introduction
Generally under GST provisions, the liability of pay tax rests on supplier. However, in certain cases the liability to pay GST to the government falls on the recipient. This is known as reverse charge mechanism which is covered under Notification No. 13/2017- Central Tax (Rate).
According to the said notification, services supplied by a director of a company or a body corporate to the said company or the body corporate are covered under RCM provisions (liability to pay tax falls on the company or body corporate).
For instance Mr. Shivprasad Subudhi is an Independent Director who provides services to Jyoti Pvt Ltd. Consideration received by Mr. Shivprasad Subudhi from Jyoti Pvt Ltd is covered under the RCM provisions. Liability to pay tax to the government falls on Jyoti Pvt Ltd.
Do all services provided by director’s fall under the RCM provisions?
Schedule III to CGST Act 2017 covers activities or transactions which shall be treated neither as a Supply of Goods nor a Supply of Services. Services by an employee to the employer in the course of or in relation to his employment are covered under Schedule III (not taxable under GST).
Circular No: 140/10/2020 – GST was introduced to provide Clarification in respect of levy of GST on Director’s remuneration in order to avoid contradictory scenarios like above rulings. The provisions covered in this circular are as below:-
|
Directors |
Is
it covered under Schedule III |
Taxability |
|
Directors
who are not the employees of the company [Independent directors] |
No |
Taxable on
RCM basis in the hands of the company |
|
Directors
who are employees, but are not functioning according to the contract of
employment Where TDS under Income Tax law is deducted u/s 194J (payment of
professional fees) |
No |
Taxable on
RCM basis in the hands of the company |
|
Directors
who are employees functioning according to the contract of employment Where
TDS under Income Tax law is deducted u/s 192 (salary payment) |
Yes |
Not Taxable |
Points to be noted:-
1.
A
Whole Time Director may or may not be the employee – As per section 2(94) of
the Companies Act, 2013 a whole time-director is an inclusive definition, and
thus he may be a person who is not an employee of the company
2. Section 149(6) of the
Companies Act, 2013, read with Rule 12 of Companies (Share Capital and
Debentures) Rules, 2014 makes it clear that an independent director should not
have been an employee or proprietor or a partner of the said company, in any of
the 3 financial years immediately preceding the financial year in which he is
proposed to be appointed in the said company.
3. Directors function in dual
capacity – capacity of director and in capacity of employee. Test would be
whether it is a “contract for service” (i.e., professional service) or
“contract of service” (i.e., employment contract).
What is an important test to determine whether GST is leviable on services provided by directors?
The following
criteria needs to be fulfilled in order to not constitute as a supply under
GST:-
1.
There
should be an Employer-employee relationship (master servant relationship).
2. TDS is deducted u/s 192 and
not u/s 194J of the Income Tax Act.
3. It should be a contract of service and not a contract for service.
For Example where RCM is applicable on services provided by directors:-
Question - Mr Biswajit Mishra is a director of Samal Pvt Ltd. On payment of consideration to Mr Biswajit Mishra, Samal Pvt Ltd deducts TDS u/s 194J of Income Tax Act (TDS on professional fees). IS GST chargeable on this amount?
Answer - Services provided by Mr Biswajit Mishra constitute as a supply under GST as there is not employer-employee relationship, which is proved by the fact that TDS is deducted u/s 194J. Consideration received by the director is taxable on RCM basis in the hands of the company.
What is the time of supply for supply of director’s services when they are covered under RCM?
The Time of supply is the point when the supply is liable to GST. In reverse charge, recipient is liable to pay GST. Therefore, time of supply for supplies under reverse charge is different from the supplies which are under forward charge.
Time of Supply shall be earliest of:-
1.
The
date of payment as entered in the books of account of the recipient or the date
on which the payment is debited in his bank account, whichever is earlier
2. 61st date from the date of issue of invoice
If it is not possible to compute time of supply using above method, the time of supply shall be the date of entry in the books of account of the recipient of supply.
For Example:-
- Date of payment – 15th July 2019
- Date immediately after 60 days from the date of issue of invoice (Suppose the date of invoice is 15th May 2019, then 60 days from this date will be 14th July 2019)
- Date of entry in books of receiver 20th July 2019
- Time of supply of service, in this case, will be 14th July 2019
Can a supplier avail Input Tax Credit (ITC) on GST paid under RCM?
A supplier (director) cannot take ITC of GST paid on goods or services used to make supplies on which recipient is liable to pay tax.
Who can avail the benefit of ITC on services provided by a director to a company or body corporate?
1.
The
question of availing ITC does not arise on cases which do not constitute as a
supply under GST (employer-employee relationships).
2. The recipient (company or body corporate in this case) can avail ITC of GST amount that is paid under reverse charge on receipt of services (cases where employer-employee relationship does not exist)
What is the GST payable on services provided by directors when they constitute as a supply under GST?
GST Rate payable by receiver (company or body corporate) is 18%.
What compliances are required to be followed in respect of supplies under RCM?
1.
As
per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017,
every tax invoice has to mention whether the tax in respect of supply in the
invoice is payable on reverse charge.
2. This also needs to be
mentioned in receipt voucher as well as refund voucher. (if tax is payable
under RCM)
3. Every registered person is
required to keep and maintain records of all supplies attracting payment of tax
on reverse charge
4. Any amount payable under
RCM shall be paid by debiting the electronic cash ledger.
5. Reverse charge liability
cannot be discharged by using input tax credit. However, after discharging
reverse charge liability, credit of the same can be taken by the recipient, if
he is otherwise eligible.
6. Invoice level information
in respect of all supplies attracting reverse charge, rate wise, are to be
furnished separately in the table 4B of GSTR-1.
7. Advance paid for reverse charge supplies is also leviable under GST. The person making advance payment has to pay tax on reverse charge basis.
Thus, it can be concluded that :-
1. Remuneration paid to whole time/executive/managing director in the capacity of employee is not taxable under GST.
2. Sitting fees/ Commission
paid in the capacity of director (independent directors, whole time director, executive
director, managing director) is be liable to GST under RCM.
