Applicability of Service tax on director remuneration

[Vikas Aggarwal]

Dear Sir,

Please guide me on this issue.

Fact of the Case:-

Mr. A is a director of B Pvt Ltd & getting a lump sum incentive of Rs. 9,00,000/- at the end of the year 2013, he has also an employee in A pvt Ltd. & getting monthly salary of Rs. 50,000/-.

B pvt ltd is a subsidiary company of A pvt ltd.

B Pvt ltd issued form 16 to Mrs. A (Means deduct TDS u/s 192, treat incentive in his books as salary/remuneration paid to director)

Queries:-

1. Can service tax applicable in the case of incentives paid to Mrs. A by B pvt ltd.

2. If B Pvt ltd treat this incentives as salary paid to director can it be out of the purview of Professional receipt & not liable for service tax.

Regards,

CA Vikas Aggarwal

[dipsang vadhel]

Central Government has issued two notifications providing for service tax liability under reverse charge on services provided by directors.

New Notification No. 45-ST has clarified that in respect of services provided by the directors to company, liability to pay service tax would be on the company under reverse charge. Companies would be required to pay service tax on gross amount paid to directors. However, services provided by directors as employee in the course of employer- employee relationship would not be covered by the said provision as employer-employee relationship activities are already excluded from the definition of service itself under section 65B (44) of the Finance Act.

It would be crucial to have proper documentary evidence establishing that relationship is of employer and employee. In such a situation, the question about the relationship of employer and employee needs to be determined with reference to the facts and circumstances of each case. Some tests which will help in identifying whether employee –employer relation xists or otherwise are:

1. The master’s power of selection of his servant,

2. The payment of wages and other remuneration

3. The right to control the method of doing the work, and here the distinction between the physical control and the right of control is subtle, but very important

4. The master’s right of suspension or dismissal and disciplinary actions,

5. organizational test. 

Any payment beyond the scope of employee-employer relationship would, however, attracts service tax liability under reverse charge mechanism.

AI Summary

Service tax on director services: company liable under reverse charge unless within employer-employee relationship, with proof required. Company liability arises under reverse charge to pay service tax on the gross amount paid to directors for services rendered unless those services fall within an employer-employee relationship excluded from the definition of service; establishing employment requires documentary evidence and consideration of tests such as selection and appointment control, payment of remuneration, right of control over work methods, disciplinary authority including suspension or dismissal, and organizational integration-payments beyond employment scope attract service tax under reverse charge.