A director’s reward refers to the remuneration paid to such directors for the discharge of his function as a manager of a company. Remuneration includes salary, fee, commission, bonus, stock option, and any other benefit. The applicable laws regulating directors’ remuneration in India are the Companies Act of 2013, the Income Tax Act of 1961, and facilities provided by SEBI regarding listed companies.
Directors’ remuneration refers to the award given to directors for the performance of their duty of managing a company. The remuneration received by directors may be in the form of salary, fees, commissions, bonuses, stock options, or any other kinds of benefits. Applicable laws regulating directors’ salary in India are the Companies Act, 2013; Income Tax Act, 1961; and facilities provided by SEBI to listed companies.
The compensation arrangement varies with different types of directors, namely executive, non-executive, or independent. Executive directors, i.e., Managing Directors and Whole time Directors, are paid fixed salaries, and award issues pay on a performance basis, whereas non executive and independent directors get sitting fees and can join profit-sharing schemes.
Strengthened remuneration standards guarantee appropriate remuneration levels and convergence of director interests and corporate profitability along with shareholders’ expectations. Governed and clear compensation practices play a vital role in attracting and retaining talents, and such effectiveness results in prosperity for business as well as improvements in corporate governance.
GST Applicability On Directors’ Remuneration
The introduction of Goods and Services Tax (GST) on directors’ compensation has created contrasting legal and procedural interpretations. The point of controversy is whether or not the directors’ remuneration constitutes a “supply of services” as per the GST law and, if it does, whether such remuneration comes under the Reverse Charge Mechanism (RCM) or the Forward Charge.
GST is charged on directors’ salaries depending on whether they are aligned with the business. Though salaries of executive directors are exempt according to Schedule III of the CGST Act, payments made to non executive directors are subject to an 18% GST by way of Reverse Charge Mechanism (RCM). For evading penalties and for uneventful financial procedures, it becomes essential that firms classify their professionals accurately and obey both GST as well as Income Tax rules and regulations.
1. Directors Classification for GST
In determining the applicability of GST, directors are typically divided into two broad categories:
(i) Executive Directors (full-time directors, managing directors, etc.)
- Executive directors are usually employed by the company and receive salary through an employer-employee relationship.
- The services provided by employees to employers in the course of their employment are not considered a supply of services as per Schedule III of the CGST Act, 2017. Thus, salaries of executive directors are out of the purview of GST.
- Executive directors’ remuneration is liable to the Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act 1961.
(ii) Non-Executive Directors (Independent, Nominee, etc.)
- Non executive directors are remunerated by sitting fees, commissions, or other benefits, but not in an employer employee relationship.
- GST Implication: Since they are not employees, their remuneration is a supply of services under GST.
- As per Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, companies receiving services from non executive directors are required to pay GST through the reverse charge mechanism (RCM).
- The GST rate is 18% for “Other professional, technical, and business services” (SAC Code 9983).
- Sitting fees and commissions of non-executive directors are subject to 10% TDS under Section 194J of the Income Tax Act 1961 (fees for professional services).
2. GST Treatment of Directors’ Remuneration
| PARTICULARS | PAID TO | GST APPLICABILITY | TAX LIABILITY |
| Salary and Allowances | Executive Director | Not subject to GST (Employer-Employee Relationship being intact) | Not Applicable |
| Sitting Fees | Non-Executive Director | Subject to GST at 18% rate (under RCM) | Company liable to pay GST |
| Commission | Non-Executive Director | Subject to GST at 18% rate (under RCM) | Company liable to GST |
| Stock Options | Executive and Non Executive Director | Not directly covered under GST but taxable under the Income Tax Act of 1961 | Not Applicable |
| Reimbursements | Non-Executive Director | Subject to GST (if not in the nature of pure reimbursements) | Company liable under RCM |
| Professional Fees | Nominee / Independent Director | Subject to GST at 18% rate (under RCM) | Company liable under RCM |
3. Important Rulings and Clarifications on the GST Applicability are as Follows
- AAR (Advance Ruling) for Clay Craft India Pvt. Ltd. (Rajasthan AAR – 2020): The directors’ remuneration is liable to GST under the Reverse Charge Mechanism (RCM) unless an explicit employer-employee relationship prevails.
- Circular No. 140/10/2020-GST (issued on June 10, 2020): Executive directors’ salaries are exempt from GST, whereas non executive directors’ income is subject to RCM.
4. Obligations of Compliance for Companies Paying Directors
(i) Executive Directors (remuneration by way of salary):
- Not applicable for GST.
- The company must comply with employment laws, such as PF, ESIC, and TDS (Section 192).
(ii) Non Executive Directors (Sitting Fees & Commission):
- 18% GST has to be paid under the Reverse Charge Mechanism (RCM).
- The company is required to report RCM liability in GSTR-3B and can claim Input Tax Credit (ITC) if entitled.
- A 10% TDS under Section 194J should be deducted before making payments.
GST Applicability On Directors’ Fees
Directors’ fees are defined as the reward given to directors for their expert services to a company. They can include various types of rewards, such as sitting fees, commissions, consultancy fees, and other incentives. The applicability of Goods and Services Tax (GST) to directors’ fees depends on the status of the director as being executive (employee) or non executive (independent).
The GST rate on directors’ fees varies depending on the position of the director within the company. Executive directors’ salaries are exempted under Schedule III of the CGST Act, while non-executive and independent directors’ fees attract an 18% charge under the Reverse Charge Mechanism (RCM). It is important for businesses to comply with GST, make on-time RCM tax payments, and implement TDS deductions in order to prevent legal and monetary penalties. Not only does the RCM make tax collection efficient, but it also allows business entities to recover Input Tax Credit (ITC) when entitled. A sound knowledge of the regulations helps organizations better manage payments to directors and maintain tax compliance.
Reverse Charge Mechanism (RCM) for Director Fees
According to Notification No. 13/2017 – Central Tax (Rate) dated June 28, 2017, all services provided by a director to a company are under the Reverse Charge Mechanism (RCM). Therefore, the recipient company is liable for paying the GST, not the director. The GST rate is 18% (SAC Code 9983 – Other Professional Services). The GST paid under RCM can be availed as Input Tax Credit (ITC) by the eligible companies.
Key Judicial Pronouncements and Clarifications
- AAR Ruling: Clay Craft India Pvt. Ltd. (Rajasthan AAR, 2020).
The Advance Ruling Authority (AAR) has ruled that the salary of directors comes under GST unless there is categorical proof proving the existence of an employer-employee relationship. Payments made outside a formal salary, like sitting fees or commissions, are considered a supply of services and are subject to GST under the Reverse Charge Mechanism (RCM).
- CBIC Circular No. 140/10/2020-GST (dated June 10, 2020).
Executive directors’ salaries are exempt from GST. Sitting fees, commissions, and consulting fees paid to non executive directors are subject to GST under RCM.
Compliance Requirements for Companies Paying Directors
Companies paying their directors are obliged to comply with GST requirements:
- GST Registration – Companies need to register under GST to meet their RCM requirement while paying non executive directors.
- GST Payment – In accordance with RCM, companies are obligated to calculate and pay 18% GST on directors’ fees to the government.
- Filing GST Returns – File GST liability as Reverse Charge in GSTR-3B (Monthly GST Return). Make director payments a part of GSTR-2A and GSTR-9 (Annual Return).
- TDS Deduction – Executive directors’ fees must have TDS deducted under Section 192. Fees and commissions for non executive directors can have TDS deducted at the rate of 10% under Section 194J.
Conclusion
GST is applicable to remuneration provided to directors depending on whether they are executive directors or non-executive directors. On salaries of executive directors, GST, according to Schedule III of the CGST Act, 2017, would be charged only when they are employed persons of a company but not when they receive remuneration from the company as directors. Conversely, amounts paid for and on behalf of non-executive and independent directors, such as sitting fees, commissions, and consultancy fees, would be considered to be the supply of services and consequently would be subject to an 18% GST under the Reverse Charge Mechanism.
Under this mechanism, the company is liable to pay the GST and not the director, but the company is entitled to claim Input Tax Credit (ITC) of GST paid on such services. One should be careful to comply with the GST law, pay RCM-related taxes properly in a timely manner, and deduct TDS correctly under Section 194J at 10% so that no penalty is charged. This transparent process in relation to directors’ salary taxation promotes stronger corporate governance, providing a perception of responsibility and fairness and strengthening the perception of the tax system.
