GST on Salaries paid to directors.

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.