Director's remuneration encompasses the various forms of compensation a company provides to its directors for their services, including fees, salaries, or the use of company assets. Shareholder and Board of Director approval is mandatory for disbursing director's remuneration. Directors can be classified into several types, such as executive, non-executive, managing, independent, small shareholder, women, additional, or alternate, based on their specific responsibilities within the organization. The Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 140/2020 on June 10, 2020, to clarify GST applicability on director's remuneration, specifically outlining the criteria for classifying a director as an employee. Under GST law, services rendered by an employee to an employer as part of an employment contract are exempt from GST, as they are not deemed supplies of goods or services. Conversely, if the services do not fall under an employer-employee relationship, GST becomes applicable. In such scenarios, the company, acting as the service recipient, is responsible for remitting the GST liability to the government under the reverse charge mechanism (RCM), as per Notification No. 13/2017.

GST Treatment for Executive Director Compensation

An Executive Director, also known as a whole-time or managing director, is a full-time employee with significant organizational responsibilities. The Companies Act, 2013, provides an expansive definition of 'whole-time director,' indicating that their remuneration might stem from both employment and non-employment capacities.

When a Whole-time Director Qualifies as an Employee

The following conditions must be met for a director to be considered an employee:

• A 'contract of service' exists, signifying an employer-employee relationship for the director's activities.
• Tax Deducted at Source (TDS) is applied under Section 192 of the Income Tax Act on the director's salary.
• The remuneration is recorded under the 'Salaries' head in the company's financial records.

If any of these criteria are satisfied, the remuneration paid to an executive, whole-time, or managing director is exempt from GST.

When a Whole-time Director Does Not Qualify as an Employee

Situations in which a director is not categorized as an employee include:

• A 'contract for service' is in place, where the director's activities are considered professional services, irrespective of their title.
• TDS is applied under Section 194J of the Income Tax Act on the director's fees or remuneration.
• The remuneration is recorded in a separate ledger account, distinct from 'Salaries'.

If any of these conditions are met, the director's services to the company are subject to GST at 18% and fall under the Goods and Services Tax reverse charge mechanism.

GST on Compensation for Non-Executive Directors

Non-executive directors typically do not participate in the company's daily operations; instead, their role focuses on strategic planning and policy-making to serve the company's best interests. Their relationship is generally a 'contract for service,' attracting TDS under Section 194J of the Income Tax Act on fees paid. This remuneration is accounted for separately from 'Salaries' in the books.

Consequently, services rendered by a non-executive director to the company are subject to GST and are covered by the reverse charge mechanism. A GST rate of 18% is applied to the entire amount of director's remuneration.

GST on Independent Director's Fees

Independent Directors maintain no direct affiliation with the company and provide specialized advice to the Board of Directors on an as-needed basis. They are not involved in the company's routine business and have not been classified as an employee, partner, or proprietor of the company for at least three years before their appointment. Therefore, GST is applicable to the remuneration paid to Independent Directors.

Under the Reverse Charge Mechanism (RCM), the company, as the service recipient, is responsible for paying GST at 18% on the total remuneration amount for independent directors.

Applicable GST Rate for Director Fees

The government has set the GST rate for director's fees or remuneration at 18%. This tax is to be applied under the reverse charge mechanism, with the company receiving the director's services being responsible for its payment.