Mohan Lavi

Is GST payable on directors’ remuneration?

Mohan R Lavi | Updated on April 21, 2020

Decision taken by the AAR in the Clay Craft case suggest that the law is moving dangerously closer to taxing some employer-employee transactions

The Japanese proverb “Aite no nai kenka wa denkinu” translates as “One cannot quarrel without an opponent”. As long as tax departments are there, most taxpayers in India will not rue the lack of an opponent to quarrel with. This is becoming all the more apparent if one goes by some of the decisions given by the Authority for Advance Rulings (AAR) under GST. A recent decision of the Rajasthan AAR is a case in point.

Clay Craft India Pvt Ltd, a Jaipur-based manufacturer of china crockery and other types of utensils, has always been paying its GST dues including GST on reverse charge on commission paid to its directors. While the media was second-guessing whether GST was payable on reverse charge basis for the remuneration paid to directors, Clay Craft decided to resolve the issue by asking the AAR for its opinion.

The contention of Clay Craft was that GST was not payable on the remuneration paid to directors since they are also employees of the company performing different roles such as procurement of raw material, production, quality checks, dispatch, accounting, etc. Like other employees, taxes and provident fund are being deducted from their salaries. The firm even quoted from Supreme Court and Karnataka High Court decisions that the managing director could be considered to be an employee. But all this to no avail.

AAR Rajasthan concluded that GST is payable on reverse charge basis due to the definition of consideration in Section 2(31) of the CGST Act and the language of Notification No 13/2017-Central Tax which used the words “ services rendered by directors”. The AAR also concluded that a director is not an employee and hence the employer-employee nexus exemption that is available in the Second Schedule to the CGST Act cannot be applied here.

It is not difficult to understand why most AAR decisions are pro-revenue. The AAR has been trained to base every decision on the premise that the provisions of the CGST Act are almost similar to the SGST Act of the States. Due to this, if there is a decision in another State on the same topic, the AAR simply adopts that decision without bothering to discuss the case de novo.

In the case of Clay Craft, the AAR in Rajasthan simply followed what its counterpart in Karnataka had ruled in a similar case. The final word has not been said as whether GST is applicable on the recovery of notice period pay from an employee. Decisions such as the one in Clay Craft suggest that the law is moving dangerously closer to taxing some employer-employee transactions.

For all the talk of GST being a unifying tax, on-the-ground realities seem to suggest a different view. This decision of the AAR in Rajasthan distinguishes between employees and directors who could be performing exactly similar functions. While the levy of GST on reverse charge basis on commission and sitting fees paid is understandable (as they are for specific services), extending the same logic to remuneration paid for non-specific services such as an employment contract isn’t defendable — Clay Craft may well approach the High Court of Rajasthan for this.

Thanks to the decision of the Madras High Court in Revenue Bar Association vs Union of India, there is a delay in constituting benches of the GSTAT. The court agreed with the contention of the petitioners that the number of administrative members in GSTAT cannot exceed the number of judicial members. For GST taxpayers, their wait for some sort of justice just keeps getting longer and longer.

The writer is a chartered accountant

Published on April 21, 2020

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