Companies have to pay service tax on payments to such directors

Non-executive directors have got service tax reprieve. The Finance Ministry has said that the company –not the non-executive director – has to fork out service tax on payments to such directors.

The service tax will be entirely collected from the company concerned under a reverse charge mechanism, according to the Finance Ministry.

A reverse charge mechanism involves the recipient of the service paying the service tax, rather than the service provider. In this case, the company is the service recipient and the non-executive director is the service provider.

Ever since the “negative list” of services taxation was ushered in from July 1, it was widely perceived that payments to directors would attract service tax.

This is because such payments were not specifically mentioned in the list.

But by bringing payments to directors under reverse charge, there is relief for non-executive directors.

The company concerned would also have to go through the compliance burden and register itself with the service tax authorities.

“By making the reverse charge provision of tax on services of non-executive director and nominee director, the Central Government has given great respite to individual directors,” said J.K. Mittal, Co-Chairman of Assocham National Council on Indirect Taxes.

Some sections of corporate India feel that there may not be any case for service tax at all on payments made to directors.

They point out that a Finance Ministry circular had, in 2009, said that directors were performing management functions and undertaking fiduciary responsibilities and, therefore, were exempt from service tax. It is now contended that the same logic should hold good even in a negative list regime.

“My view is that service tax should not be collected at all from payments made to non-executive directors. There is no question of directors providing any service as they are only discharging fiduciary responsibility and performing management function,” said P.K. Rustagi, Vice-President, Legal and Company Secretary, JK Tyres & Industries.

He said that Government will surely not be better off in terms of additional revenues in the case of manufacturing companies, as these will claim Cenvat credit (set it off against excise dues) on service tax forked out towards director payments.

(This article was published on August 9, 2012)
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