The Rajasthan AAR ruling in case Clay Kraft India sets another example where AAR had provided
more confusion to the taxpayer. In the
ruling, the AAR considered only Notification No.13 /2017- Central Tax (Rate)
dated 28.06.2017, where it was held that services supplied by director of the
company is liable for GST under reverse mechanism.
However, the AAR completely ignored clause
1 of Schedule III of CGST Act, in terms of which, services provided by an
employee in the course of employment is not a supply liable to GST. Thus where
there is an employee employer relationship exists, GST cannot be
applicable.
Thus passing the one line judgment by AAR without
considering the all facts and legal provisions is void in law .
Following should be the guidelines in respect of applicability of GST on remuneration payable
to directors of the company.
|
Type of Director
|
GST Implication
|
|
Whole time Director
|
Not subject to GST.
|
|
Managing Director
|
Not subject to GST.
|
|
Executive Director
|
Not subject to GST.
|
|
Non-Executive Director
|
RCM applicable.
|
|
Independent Director
|
RCM applicable.
|
|
Nominee Director
|
RCM applicable.
|
Also, being an advance
ruling, while this should not qualify to be a binding precedent to other
companies.
Further “employee" as contained in sub-section
(9) of Section 2 of the ESI Act that reads as under:-
"2(9). "employee" means any person
employed from wages in or in connection with the work of a factory or
establishment to which this Act applies and- who is directly employed by the
principal employer, on any work of, or incidental or preliminary to or
connected with the work of, the factory or establishment, whether such work is
done by the employee in the factory or establishment or elsewhere or
who is employed by or through an immediate employer,
on the premises of the factory or establishment or under the supervision of the
principal employer or his agent on work which is ordinarily part of the work of
the factory or establishment or which is preliminary to the work carried on in
or incidental to the purposes of the factory or establishment; or
Hon’ble Supreme Court in the case of ESI Corporation
vs Venus Alloy Pvt. Ltd [TS-5326-SC-2019-O] has held that Director of a Company
receives remuneration for discharge of any duty then the Director will come
under the definition of "employee" u/s 2(9) of the ESI Act 1948.
Further, the Hon’ble Supreme Court in the case of Apex
Engineering [1998 (1) SCT 63 (SC)] the Board of Directors of respondent Company
resolved to elect one of its Directors as Managing Director of the Company and
to grant him annual remuneration of Rs. 12,000/- for rendering services as
Managing Director and, inter alia, held that the Managing Director, even when
to be treated as principal employer, could also be an employee and could carry
such dual capacity.
Thus Applying the ratio decidendi, directors would be
considered as an employee of the company as it would be covered under sec 2(9)
of the ESI Act’1948 and hence we can draw that Whole time director, Managing
director, Executive director would be considered as employee of the company and
no GST would be attracted under reverse charge provided it satisfies all the
limb as laid down in judgment mention supra.
The Companies Act of 2013 considers directors as ‘key
managerial personnel’ and under various provisions hold them as an ‘officer in
default’ under host of fiscal, commercial and labour laws. In addition, the law
specifically postulates concept of ‘whole-time director’, which includes a
director in whole-time employment of the company. Having said that, there is also a clear line
of jurisprudential opinion that directors, in general, are not employees of the
company. Instead, they are trustees who carry out the affairs of the company in
a fiduciary company.
This principle though is applicable for all forms of
directors and does not distinguish between executive and non-executive roles.
This is the exact reason why the law makes elaborate provisions for appointment
of directors, including their remuneration, qualification, disqualification,
removal etc. For that matter, the law specifically enumerates the ‘duties of
directors’ (Section 166) which corroborates this dimension as they are obliged
inter alia to act in ‘good faith’ to promote the company’s objectives,
including its employees and shareholders. Violation of such duties is a
publishable offence under various provisions. This aspect clearly reveals that
the directors are in a different situation compared to an employee simplicitor.
In the aforesaid legal sense, from a company law
perspective, it is perhaps arguable that a director as an employee, in his
fiduciary responsibility, is on a higher pedestal than his employment. I doubt
if the fiduciary responsibility can be extended to an interpretation in a manner
that a ‘contract for employment’ is read as a ‘contract for service’ and a GST
fastened. This could never have been the
intent of the statute, particularly since the levy of GST on employment has
been specifically left out. To this extent, I do not agree with the principles
set out in the ruling.
Thus, Learning form past experiences of directors’
liability, in the context of “officer in default”, cases have reached the
highest court, which could have been avoided had the government intervened. The
GST levy on executive directors is one such opportunity the GST Council and
CBIC should not miss to clarify.
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