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Executive director is employee, not liable to pay GST: Karnataka AAR

The ruling runs contra to those of other state AARs, which have held all directors are liable to pay GST

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GST | Indian Economy

Indivjal Dhasmana  |  New Delhi 

GST, TAX
The authority delivered this ruling when a petitioner with multiple income sources sought to know which heads attract GST and which don't.

While you will not be liable to pay goods and services tax as an executive director of a company, your income will suffer through the reverse charge mechanism (RCM) if you at a non-executive director. This was the verdict delivered by the Karnataka authority for advance rulings (AAR). The order has stirred a controversy as other state AARs have held all directors are liable to pay

The authority delivered this ruling when a petitioner with multiple income sources sought to know which heads attract and which don't.

The AAR's ruling is based on the fact that executive director is an employee of the company and his work doesn't fall under the definition of supply under the CGST Act. On the other hand, non-executive director is not an employee and as such his inputs are essentially services under the CGST Act and therefore taxable under RCM.

Normally, a person or entity providing services pays the tax to the exchequer, and recovers it from the receiver of the service. But under RCM, the receiver of the service pays the tax by deducting it from the service provider's compensation.

Harpreet Singh, partner KPMG, said,"This is a more plausible ruling which has rightly held that salary of a partner and remuneration of Executive Director are not taxable under GST.”

The ruling should settle the dust raised by the recent Rajasthan ruling, in the case related to Clay Craft, added Singh.

In that ruling, the Rajasthan AAR had ruled that the services rendered by the director to the company for which consideration is paid to them in any head is liable to GST under RCM and the situation would remain the same even when the director is also a part time director in another company. The AAR did not distinguish between executive director and non-executive director as was done by its Karnataka counterpart.

In a case relating to ALCON Consulting Engineerrs (India), the Karnataka AAR in 2017 had also ruled that the consideration paid to the director in the form of remuneration is in relation to services provided by the director to the Company. Thus, the Company is required to pay GST under RCM on remuneration paid to the director, it had held.

The issue has now to be settled by appellate authorities for AAR or the government through a clarification. The GST Council had approved setting up of central AAR to decide on contradictory rulings of state authorities, but the body is yet to come up.

Abhishek Jain, partner at EY said,"Given the divergent rulings and widespread impact, the government should consider issuing a clarification proactively on the taxabability of various considerations paid to whole time directors."

GST applicability of other considerations, as ruled by Karnataka AAR:

1) Working partner getting salary is not taxable under GST

2) If this partner gets earnings towards his share of profit, it is not liable to tax

3) The income received from renting of residential property by non-executive director is to be included in his aggregate income, though it is an exempted supply

4) Interest received from amounts extended as deposits, loans, advances are to be included in the income.

First Published: Mon, May 11 2020. 17:50 IST
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