Service Tax on Commission to Directors

[Kaushik Seshadri]

The company pays commission to non- executive directors not exceeding 1% of the net profit. Per Circular 115/09-ST dated July 31, 2009 excludes compensation paid to directors from business auxiliary service, although as per notification no. 45/2012 dated 7th August 2012 includes service provided by a director of a company in the service tax net (reverse charge). As per clarification by General Circular No. 24/2012 dated 9th August 2012, if the remuneration exceeds the limit of 1% of net profit on account of service tax for the FY 2012-13, it shall not be construed as excess remuneration beyond the 1% limit.

However, there is no clarification regarding liability of service tax for the FY 2013-14. As as result of this, if Service Tax would be paid in addition to commission by the company, the overall remuneration would exceed the 1% limit.

Respected Elders, the clarification required is whether Service Tax can be paid by the company separately over and above the 1% Commission to Directors under the reverse charge mechanism or should the Company deduct the Service Tax and pay the balance Commission to the Directors?

Thank you very much for the time and interest you have taken in this matter.

[Rajagopalan Ranganathan]

Sir,

The commission is paid to the director and the service tax is paid to the Government. Therefore there is no question of clubbing both to find out whether the commission paid exceeds 1%. Since the service tax is paid on reverse charge mechanism, the company which pays the service tax is eligible to take credit of the same.

AI Summary

Service tax on director commission: tax paid under reverse charge is separate and not included in the remuneration cap. The issue is whether service tax paid under the reverse charge on commission to non executive directors is to be treated as part of the 1% of net profit remuneration cap. The advisory states that service tax paid under the reverse charge is a separate tax liability payable to the government and should not be clubbed with director commission for computing the 1% cap; the company paying the reverse charge may, where applicable, claim input tax credit.