Remuneration under IT Act: Salaries not taxable, fees for services taxable under GST

The appellate authority concluded that remuneration declared as "Salaries" and subjected to TDS under Section 192 of the IT Act is not taxable under GST. However, remuneration declared as fees for professional or technical services and subjected to TDS under Section 194J of the IT Act is taxable under GST on RCM basis. The appeal was disposed of accordingly.

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Issues Involved:
1. Leviability of GST under Reverse Charge Mechanism (RCM) on salary paid to Directors.
2. Applicability of GST if the Director is a part-time Director in another company.

Detailed Analysis:

1. Leviability of GST under Reverse Charge Mechanism (RCM) on salary paid to Directors:

The appellant, M/s. Clay Craft (India) Pvt. Ltd., sought clarification on whether GST is payable under RCM on the salary paid to Directors who are also employees of the company. The Rajasthan Authority for Advance Ruling (AAR) ruled that the consideration paid to Directors attracts GST under RCM as per entry No. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017. The appellant contested this ruling, arguing that Directors working full-time under an employment contract should be considered employees, and their salaries should not attract GST under RCM.

The appellant cited definitions and judicial precedents to support their claim that Directors can be employees. They referenced the distinction between "contract of service" (employment) and "contract for service" (independent contractor) upheld by the Supreme Court in Indian Medical Association vs V.P. Shantha. They also pointed to similar provisions under the erstwhile Service Tax regime and argued that the legislative intent under GST should be consistent with Service Tax, where salaries to whole-time Directors were not taxed under RCM.

The appellant highlighted a judgment from the CESTAT Mumbai in Rent Works India (P) Ltd. Vs Commissioner of C. Ex., Mumbai, where remuneration paid to a Director was treated as salary by the Income Tax Department and not taxed under Service Tax. They argued that the same principle should apply under GST, emphasizing that the same Ministry (Ministry of Finance) should not take contradictory positions.

During the personal hearing, the appellant relied on CBIC’s Circular No. 140/10/2020 - GST dated 10.06.2020, which clarified that remuneration declared as "Salaries" and subjected to TDS under Section 192 of the IT Act is not taxable under GST as it is considered a service by an employee to the employer.

2. Applicability of GST if the Director is a part-time Director in another company:

The AAR ruled that the situation remains the same even if the Director is a part-time Director in another company, and GST would still be applicable under RCM. The appellant did not provide specific arguments against this part of the ruling, focusing instead on the broader issue of whether Directors’ salaries should be subject to GST under RCM.

Discussion and Findings:

The appellate authority reviewed the appeal, the AAR ruling, and the CBIC Circular. It was clarified that:
- Remuneration paid to independent Directors or those not employed by the company is taxable under RCM.
- Remuneration declared as "Salaries" in the company’s books and subjected to TDS under Section 192 of the IT Act is not taxable under GST.
- Remuneration declared separately as fees for professional or technical services and subjected to TDS under Section 194J of the IT Act is taxable under GST, with the company liable to pay GST on RCM basis.

Conclusion:

The appellate authority concluded that the part of Directors’ remuneration declared as "Salaries" and subjected to TDS under Section 192 is not taxable under GST. However, remuneration declared as fees for professional or technical services and subjected to TDS under Section 194J is taxable under GST on RCM basis. The appeal was disposed of in these terms.

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