Karnataka AAR: No GST on Executive Director’s Remuneration

The Karnataka Authority for Advance Ruling (AAR) notified on 04 May 2020 regarding the applicability of Goods and Services Tax (GST) on director remuneration. Mr Anil Kumar, who is a director in a private company, received director remuneration and approached Karnataka AAR on the applicability of GST. 

The Karnataka AAR bench has clarified that GST will not apply to the director remuneration if he is classified as an employee of the company (executive director). However, if the director is classified as a non-executive director, i.e. nominated director, and provides services to the company, then the director remuneration is subject to GST. In such cases, the reverse charge mechanism will apply, and the company as a recipient of the services is liable to pay the GST.

Thus, this AAR ruling will be useful to Indian companies to substantiate that GST does not arise in case of remuneration paid to executive directors, who mostly are key managerial personnel of the company. The ruling draws additional significance, as a month ago, the Rajasthan AAR had held to the contrary and created confusion.

The schedule III of the CGST Act states that services by an employee to the employer are not considered as supply. The AAR noted that the applicant had not submitted any documentary evidence such as a copy of employment agreement, appointment letter, PF and ESI deduction to decide whether the applicant is an employee or not. However, the AAR concluded that if the director received the salary as an employee, it would be outside the scope of GST.

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The Notification No 13/2017 states that the director services received by the company are covered under reverse charge mechanism, and the company is liable to pay GST. However, the notification does not bifurcate clearly between directors such as executive and non-executive. Hence, there is a need for CBIC circular on the applicability of GST on director remuneration, which can provide more clarity to the directors and companies.

For any clarifications/feedback on the topic, please contact the writer at dvsr.anjaneyulu@cleartax.in

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