GST on Director’s Remuneration

Who is a Director?

A director is an individual responsible for managing and guiding a company. Depending on their role, a director may be classified as:

• Executive Director (Whole-time Director, Managing Director)
• Non-Executive Director (Independent Director, Small Shareholder Director, Women Director, Additional Director, Alternate Director)

Each director’s remuneration is subject to approval from shareholders and the Board of Directors.

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Remuneration Structure for Directors

1. Whole-time Directors & Managing Directors

• Can receive remuneration either as a fixed monthly salary or a percentage of net profits.
• Their remuneration cannot exceed 5% of net profits individually.
• If multiple whole-time directors exist, the combined remuneration must not exceed 10% of net profits.

2. Non-Executive Directors

• May receive payment on a monthly, quarterly, or annual basis.
• Can also be compensated through commission, subject to a special resolution and profit-based limits.

3. Remuneration in Private Companies

• Governed by the Articles of Association of the company.
• The Companies Act, 2013, does not impose strict limits on private companies, giving them flexibility in structuring remuneration.

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GST Applicability on Director’s Remuneration

The CBIC Circular No. 140/2020 (10th June 2020) clarified when GST is applicable on director’s remuneration. The key factor is whether the director is classified as an employee of the company.

1. Whole-time Director as an Employee

If a whole-time director qualifies as an employee, their salary is treated as an employer-employee transaction and is not subject to GST. The following conditions determine whether a director is an employee:

• A Contract of Service exists (employer-employee relationship).
• Salary is subject to TDS under Section 192 of the Income Tax Act.
• Remuneration is recorded under the ‘Salaries’ head in the company’s books.

GST Impact: No GST is applicable.

2. Whole-time Director Not Classified as an Employee

If a whole-time director does not qualify as an employee, their remuneration is considered a professional fee, making it subject to GST at 18% under the reverse charge mechanism (RCM). The following conditions indicate the absence of an employer-employee relationship:

• The director is providing services under a Contract for Service (professional services).
• Remuneration is subject to TDS under Section 194J of the Income Tax Act.
• Payments are recorded separately (not under ‘Salaries’).

GST Impact: The company must pay 18% GST on a reverse charge basis.

3. GST on Non-Executive Directors’ Fees

Non-executive directors do not participate in daily operations but contribute through strategic planning and policy-making. Since their remuneration is classified as Contract for Service, the following tax rules apply:

• Subject to TDS under Section 194J.
• Payment recorded separately from salaries.
• GST at 18% under reverse charge mechanism applies.

GST Impact: The company must pay 18% GST under RCM.

4. GST on Independent Directors’ Fees

Independent directors provide expert guidance without being involved in daily operations. Their fees are also categorized as professional services:

• TDS under Section 194J applies.
• GST at 18% under RCM.

GST Impact: The company is responsible for depositing 18% GST under the reverse charge mechanism.

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Breakdown of Payments Under Section 194J

The following types of payments to directors attract TDS under Section 194J and are subject to GST at 18% (RCM applicable):

• Sitting Fees (for attending board meetings)
• Fees for attending meetings
• Remunerations (excluding salary)
• Commission
• Brokerage

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Conclusion

The structure of director’s remuneration varies depending on whether they are whole-time, non-executive, or independent directors. While whole-time directors classified as employees are exempt from GST, others fall under the reverse charge mechanism with an 18% GST liability on the company. Understanding these provisions helps businesses comply with taxation laws while ensuring fair compensation to directors.