The Central Board of Indirect Taxes& Customs (CBIC) has cleared numerous speculations going on the possibility of GST to be levied on the Director's “Salary” through a circular notified on 11th June 2020. The speculations regarding the taxability of a director/independent director" came into being after the contradictory views expressed by the state advance ruling authorities regarding the following deliberations-

a.     Whether a director (whole time/ independent) is a full-time employee of the company? 

b.    Whether the remuneration received by the independent director shall be subject to Income tax or under the GST for his services?

The circular renders "No GST shall be charged on the part of a director's payment, which is indicated as "salaries' in the books of accounts of the company and is a subject to Tax Deducted at Source(TDS) under the Income Tax Act 1961.

However, if a portion of the director's remuneration is not declared as "salary" as per the company's books of accounts, it would be treated as payments for the professional or technical services and hence the GST will be charged accordingly.

Thus, the latest notification puts contrasts as to a director, who is an employee of a company and an independent director, who is not an employee of the company and accordingly interprets that whose remuneration would be taxable under GST and whose will be exempted.

I.    Who shall be described as a director of a company under the provisions of the Companies Act 2013?

Section 2(34) of the Companies Act 2013 defines the term “director“as “a person duly appointed by the Board of the company as a director". Together, the persons designated as directors form a board known as the "Board of Directors" act as the brain of the company for the furtherance of the objectives for which the company came into being. The main duties of a director include- 

a.    Determining the company’s  purposes and  strategic plans;

b.    Overseeing  progression in fulfilling the purposes and strategic plans;

c.    Appointing and overseeing the functioning of the senior management

d.    (auditors, Key Managerial Personnel, etc.)

e.    Managing the company's activities with connected parties, e.g. creditors, stakeholders, etc.

The companies Act 2013 prescribes for a certain number of directors a company can have in a company. As per the provisions of section 151 of the relevant Act, a company can have maximum directors ranging from 15 to 20(depending upon the type of the company (One Person Company, a Private or a Public company).

Section 149 of the above- mentioned Act presents for the appointment of the directors in the company as it states" every company shall have a” Board of Directors” consisting of individuals such as directors and shall have— 

(a) a minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company; and

(b) a maximum of fifteen directors(more than 15 directors can be appointed subject to the passing of special resolution).

II. Whole-time Directors vs. Independent Directors-

An Executive Director is either a person one who dedicates his whole- time to the company and holds a significant personal stake in the company as his source of income(i.e. a Whole Time director or he can be a Managing Director (i.e., one who is employed by the company as such and has substantial control over the management & affairs of the company.

Whereas a non- executive director who is neither a whole-time nor a Managing Director of the company. Unlike the WTD or a Managing director, he is not a part of the day to day activities of the working of the company. Clause 49 of the Listing Agreement provides for the requirement of appointing non-executive directors by stating "in every listed entity the BOD shall have a combination of executive and non-executive Directors, with at least a fifty percent (50%) of the Board comprising non-executive Directors.

Where the chairman of the BOD is a non-executive director in such a case, the Board should at least comprise of at least one-third of the total directors as independent Directors and;

And, in case he is an executive director then at least half of the Board should comprise of the independent Directors.

Independent Directors- Though, the Board of Directors are the one responsible for making important decisions for the company, however, to ensure that there is no collusion among them for personal gain against the public interest, the concept of "Independent Directors" was introduced to keep a check on the working of the company and give an independent view.

Clause 49 of the Listing Agreement defines an "Independent Director" as that non-executive Director of the company who-

i.     is not in the regular employee of the company and does not draw a salary but draws remuneration for giving professional services to the company;

ii.    do not have any material or pecuniary ties with the company, or its promoters, its Directors, its senior management in the company or its holding company, its subsidiaries, and associates which may impair his independence;

iii.    is not associated with the promoters or persons occupying management positions(KMPs or directors) in the company; 

iv.    has not held any executive position in the company in the immediately preceding three financial years;

v.    is not a partner or an executive or not a partner or held any executive position during the preceding three years in of any of the below mentioned-

•     in the statutory audit firm or in the internal audit firm that is related to the company, and

•    the legal firms and consulting firms that have a substantial link with the company;

vi.    is not  either a material supplier, service provider or customer or a lessor or lessee of the company;

vii.     is not essentially a substantial shareholder of the company, i.e., owning either two percent (2%) or more of voting  power; and

viii.    Is not less than twenty-one (21) years of age.

III.    Levying of GST in the remuneration component other than ”Regular Salary”

Independent directors are not the employees of the company and do not draw “salary” from the company, but charge “professional /technical fee”. Thus, clarifying all confusion concerning if the "professional fees" paid to the "Independent director" shall be subject to payment to GST or not. The Ministry of Finance has notified on 10.06.2020 that such remuneration paid to the independent director & remuneration paid other than salary shall attract GST @ 18%.

In the same manner, the Whole-time Directors including the Managing director of the company who is in the full-time employment of the company, their remuneration shall be divided into two portions and the taxes shall be charged accordingly- 

i.    Such a portion of the Director's remuneration which is declared as "Salaries" in the books of accounts of a company shall continue to be subjected to TDS provisions under the Income Tax Act 1961.

ii.    But, the part of the employee Director’s remuneration which is stated as “Payments other than salaries” in the accounts of the company shall be subject to GST. Accordingly, the company shall be liable to collect and submit GST to the Government in this behalf. 


eStartIndia Team

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