Professionalising the role of independent directors

After almost a decade since the concept of Independent Directors (ID) got legislated in India it is time for serious stock taking on their overall performance.

While it has been a mixed bag of sorts there is no doubt that the institution of IDs has created a positive impact and has acted as an important check when required.

Of course there have been cases where the regulators have pulled up the IDs for negligence and shoddy performance.

The learning curve is continuous. Just as every new delivery is a new examination for a batter, each board meeting poses a new challenge for an independent director.

Fee tangle

A recent article triggered a debate on the characterisation of the sitting fees and commissions received by IDs. The short question is whether it is “Professional Income “or “Income from Other Sources?”

The Regulators expect a high level of professionalism from the IDs and equate their role to that of whole time directors. For retired professionals, who are senior citizens, sitting fees is their main source of income. The preparatory work before and after committee and Board meetings is laborious and tedious. The need for continuous reading and updation is a given and necessity. There is unanimity that sitting fees have to be categorised as “Professional income.”

But usually sitting fees are classified as “other sources”. The main reason for this is that the TDS provision Sec 194J of the Income Tax Act has a separate entry for remuneration to directors distinct from fees paid for professional services.

Should the TDS methodology dictate the correct classification of the head of income is the moot question. The advantage of classifying sitting fees and commission as “professional income” is clear. The director in question can claim some legitimate expenses which arise in the discharge of his/her duties. Moreover there is a benefit of presumptive tax up to ₹50 lakh income wherein a flat 50 per cent deduction is allowed as contained in Sec 44ADA of the Income-Tax Act.

This was meant for situations where record keeping is a problem and hence the facility to claim a flat deduction. Directors would find it difficult to accurately estimate expenses relatable to — electricity, car maintenance, travel and entertainment to the performance of their duties in question. There is bound to be a mix of personal and official in the aforesaid expenses.

This is precisely the reason presumptive tax should apply in these cases. While a flat 50 per cent deduction would look unreasonable a graded system of deduction of say 25 per cent in cases of income up to ₹50 lakh and 10 per cent over ₹50 lakh would comfortably tick the boxes of equity and a progressive system of taxation. A clarification is required clearly highlighting that the demands of an ID requires that the fees paid comes under “professional income” and not “other sources”. As a second step, a graded system of deduction mentioned above will complete the process.

The flip side is once it is treated as “professional income” IDs will have to pay advance tax which is not the case if it is treated as “other sources” . But then you cannot have the cake and eat it too.

The writer is a Chartered Accountant

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