Earlier this financial year, a lot of controversies stirred around company directors’ salary, whether a GST should be collected or not. Putting an end to that, the Finance Ministry has released a circular saying that Goods and Services Tax (GST) will not be levied on the salaries of the directors who are employees of the company.

The issue was examined for two categories. The first one referred to the independent directors and the others referred to the whole-time directors like Managing Directors treated as the employees of the company.

Important Points Of The Circular

The circular was released by the Central Board of Indirect Taxes and Customs (CBIC), the policy making body for indirect taxes under the Finance Ministry. It stated, “The part of director's remuneration that are declared as ‘salaries’ in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.”

However, there are other factors that can be subjected to GST. Below are the conditions under which the directors’ remuneration will be taxable:

·     The remuneration that is not declared as ‘salary’ in the company’s accounts and is subjected to TDS under Section 194J of the IT act as fee for professional and technical services.

·     The remuneration paid to independent directors or those directors who are not the employees of the company on reverse charge basis. These lie clearly outside the scope of Schedule III of the CGST and are taxable.

As per the media reports, at least 18 per cent GST will be charged on the payments. Also, it is the responsibility of the company to collect the GST and give it to the government.

The Controversy

The controversy around company directors’ began earlier in this financial year when Advance Ruling Authorities held different views on the levy of GST on remuneration paid to Directors of a company.

In the case of M/s Clay Craft Indian Private Limited, ARA Rajasthan held that company directors cannot be treated as the employees of the company and their remuneration should be taxable. This was later troubled when ARA, Karnataka stated the contrasting statement. It said that all the remuneration paid to the directors cannot be said to be leviable under GST.

These contradictions caused a lot of stir in the industry and everyone was keenly waiting for a judgement by the higher authorities. The new circular has now given relief to all taxpayers by interestingly intertwining the Income Tax Act and the GST provisions and ending the controversy.

For more such articles and updates, keep browsing BankingOnTips.