Service tax applicability on Directors remuneration

[Gopalarathnam Muralidharan]

A private Ltd company pays remuneration to the directors and does not deduct PF from the directors nor the company pays PF contribution.   In the recently concluded service tax audit, they observed since in the absence of PF deduction and payment of PF, no employer employee relationship subsists and hence whatever payment made to Directors are to be towards Professional services rendered and hence Director's as service provided they need to pay service tax.  My querries are

1) WHETHER PF Deduction and Payment are the conclusive proof for treating the directors as employees

2) Whether service tax audit is right in treating services of directors are to be treated as independant professional services and can not be regarded as Director's remuneration

[Vaidyanathan Venkat Raman]

In fact, if PF deductions are there it is a proof that Directors are employee of the company as because it is responsibility of employer to deduct and deposit PF from Employee's salary. In case you feel that Director's are employee, just check the Agreement the company have with the director for his appointment. From the Agreement, it can be concluded whether he is a Employee or not.

[Mahir S]

The service tax audit has made a valid point. It is now upto the company to prove from their records that Directors are employees of the company, else pay service tax.

I agree with the above submissions

[Srivatsan Krishnamachari]

An Establishment covered under PF need not cover employees whose Salary is more than Rs 6500 per month;they are called "Excluded Employees and covering them under PF is not mandatory.In this regard coverage under PF scheme alone is not the criteria in determining the Employer-employee relationship.

[S RAMAN]

Person who draw salary / wages more than Rs 6500/- are excluded from payment of PF unless the company volentrily deduct PF. Hence that cannot be taken as an evidence to levy service charge.

S Raman / Shencottah

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[ALOKE GHOSH]

I fully agree with views with Mr. Krishnamachari. It is fact that deduction of PF has no nexus to establish the employer /employee relationship. Moreover the directors who are entitled for a  remuneration more than the maximum limit prescribed by the PF Authorities are outside the purview of PF 

A. K. Ghosh

[Ashwani Rustagi]

Since the director in question is an exempted employee in terms PF rules, therefore non deduction of PF from Salary can't be said that he is not an employee of the company. You must be having some agreement with the director for his employment or board resolution or some other documentary proof to prove his employment with the company, filing of Form 23 with the ROC, deduction of employee welfare fund from his salary (if applicable in that state) etc. etc. The burden lies on the company to prove directors employment with it.

AI Summary

Employer-employee relationship: absence of provident fund deductions may trigger service-tax treatment unless employment is proven. Service taxability of directors' payments hinges on proving an employer-employee relationship; absence of provident fund deduction alone is not determinative because some directors may be excluded from PF. The company bears the burden to produce appointment agreements, board resolutions, statutory filings and payroll records to establish employment; failing that, auditors may classify director remuneration as taxable professional services.