Anaysis of reverse charge on director fees and security service

BRIEF: In the absence of mention of any date in the notification, it shall be effective from the date of publication in official gazette i.e. 7th August, 2012. For services provided between1st July, 2012 to 6th August, 2012, directors will be liable to charge service tax.

Nature of service	% of ST payable by service Provider	% of ST payable by service Recipient
Services  by a director of a company to the said company from 7th August, 2012	Nil	100%
Services  by a director of a company to the said between1st July, 2012 to 6th August, 2012	100%	NIL

INTRODUCTION:

All the companies are required to pay service tax under reverse charge. Threshold exemption limit of Rs 10 lacs is not available for services taxable under reverse charge. Thus, the employer- employee relationship between the director of a company and company may be created either by a service agreement or by the articles of the company themselves. Hence, the remuneration paid to director in accordance with the terms of the salary contract can be treated as salary.

CONCLUSION : There is distinction between salary and remuneration. TDS on salary paid to directors is deductible under section 192 while TDS on any remuneration, fees, commission etc. in a form other than salary is deductible under section 194J (1) (ba). Following clarification is given by CBDT in the Memorandum explaining the provision of Finance Bill, 2012. Under the existing provisions of the Income-tax Act, a company, being an employer, is required to deduct tax at the time of payment of salary to its employees including Managing director/whole time director. However, there is no specific provision for deduction of tax on the remuneration paid to a director which is not in the nature of salary. It is proposed to amend section 194J to provide that tax is required to be deducted on the remuneration paid to a director, which is not in the nature of salary, at the rate of 10% of such remuneration. However it is mandatory for all NED Director to issue Invoice as now they are covered under the Service Tax Net though currently they are not charging as per the Amendment. 

ON SECURITY SERVICES

BRIEF: Security service has been defined under Notification No.46-2012-ST as follows: “security services” means services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity.

Nature of service	% of ST payable by service Provider	% of ST payable by service Recipient
Services  by a Security Agency to the said company	25%	75%

INTRODUCTION:Liability to pay service tax under reverse charge arises when service provider and service receiver are from any of the following categories: Service Provider Service Receiver, Individual Body Corporate, as defined under Companies Act, 1956 (for Proprietorship firm definition refer next query), Partnership firm, HUF, AOP. In other cases, liability to pay service tax would be on service provider.

CONCLUSION : In view of the discussion made under preceding query, reverse charge is not applicable on service provided by one company to another. Basic exemption limit of Rs. 10 lacs is not available in case of liability to pay service tax under reverse charge. Service receiver is liable to pay tax from first rupee of services received. Security services are covered by the definition of input services under Cenvat Credit Rules. If the company is engaged in manufacturing of taxable goods or providing taxable services, credit of ST paid under reverse charge can be claimed. Liability of company to pay service tax under reverse charge is independent from liability of security agency. Company would be liable to pay service tax on monthly basis even though security agency is liable to pay on quarterly basis. In the absence of mention of any date in the notification, it shall be effective from the date of publication in official gazette i.e. 7th August, 2012. For period prior to this, liability to pay ST would be on security agency.