Salary to Director

[Rajeev Kedia]

If we paid salary to director is service tax to be charged ?

[JAMES PG]

Salary paid to an employee Director, ie, Executive Director, will not fall under the new levy. This is applicable to non-executive Directors, who are not employees

[YAGAY andSUN]

Sitting fees, not the Salary, will attract the service tax on reverse charge mode.

[YAGAY andSUN]

General Circular No. 24/2012

F.No.14/33/2012-CL. VII
Government of India; Ministry of Corporate Affairs

9th August, 2012

To,

All Regional Directors; All Registrars of Companies; The Institute of Company Secretaries of India; The Institute of Chartered Accountants of India, The Institute of Cost Accountants of India

Sub: Applicability of Service Tax on commission payable to Non-Whole Time Directors of a company under section 309(4) of the Companies Act, 1956 – approval of Central Government under section 309/ 310 of the Companies Act– regarding.

The Finance Act 2012 has introduced Service Tax which is applicable to anyone who provides a Service not covered under the negative/exempted list and if the value of annual revenue is more than Rs. 10 lakh. The Non-Whole Time Directors of the Company are presently not covered under the exempted list and as such, the sitting fee/ commission payable to them by the company is liable to Service Tax.

If such Service Tax is paid by the company, it will be deemed to be a part of remuneration under section 198 of the Act and would accordingly increase the remuneration amount of such Non-Whole Time Directors. This remuneration could then exceed the limit of 1% profit [u/s 309(4)] of the company when the company has a Managing /Whole Time Directors/ Managers or. 3% of the profit [u/s 309 (4)] of the company if the company does not have a Managing/ Whole Time Directors/ Managers, as the case may be. As per existing provisions of the Companies Act, 1956, this would require prior approval of Central Government u/s 309/ 310 of the Act.

It has now been decided that any increase in remuneration of Non-Whole Time Director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under section 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit [u/s 309 (4)] of the company, as the case may be, in the financial year 2012-13.

(L. K. Trivedi)

Under Secretary to the Govt. of India

[Debtosh Dey]

In MCA's circular no. 24 dated 9-Aug-12, it is stated that non-whole time director are not presently covered in the Negative list /Exemption list. I do not find wholetime directors being specifically covered either. However, 'service by an employee to the employer' is excluded from the definition of 'service'. The question is : are wholetime directors 'employees' of the company ?

[Shivshankar Mishra]

All the companies are required to pay service tax under reverse charge on any remuneration paid to its directors whether in the form of money or otherwise and threshold limit of Rs. 10 lakhs will not be applicable on such case.

As per the amended Notification No. 30/2012-ST dated 20.06.2012, the service provided by a director as a service to the Company which is leviable to Service Tax has to be paid by the service receiver. The extent of service tax payable by the recipient is 100%.

In other words the Directors of a Company are liable to Service Tax, but the same will be paid by the company.

Service tax will be additional cost to the company and company may require taking an approval to accommodate service tax within the ceiling of overall Directors’ remuneration. Since as per Section 309 of the Companies Act, the remuneration paid to Directors cannot exceed the limit of 1% profit of the company when the company has a Managing / Whole Time Directors / Managers or 3% of the profit of the company if the company does not have a Managing / Whole Time Directors/ Managers, as the case may be. The Company can pay remuneration at a rate exceeding one percent or, as the case may be, three per cent of its net profits, with the approval of the Central Government. 

But The Ministry of Corporate Affairs has clarified that if the Service Tax is paid by the Company; it will be deemed to be a part of the remuneration and would increase the amount of remuneration. And thus any increase in remuneration of Non-Whole Time Directors solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under Section 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit of the company, as the case may be, in the financial year 2012-13.

For a trading company service tax so paid as recipient of service, will be cost to the company and for the For non-trading company service tax so paid may be available as credit if it qualifies as eligible input service.

The said amendment has been brought by the Notification No.44/2012 - ST dated 07.08.2012 So now in the absence of mention of any date in the notification, it shall be effective from the date of publication in official gazette i.e. 7th August, 2012. For services provided between1st July, 2012 to 6th August, 2012, directors will be liable to charge service tax since there was no reverse charge mechanism for the said case by then.

Thanks and Regards,

Shivshankar Mishra

[email protected]

[Debtosh Dey]

Rule 2(p) of Cenvat literally denies Cenvat for service tax fully reverse charged to recipient. Does it mean tax on director's service is not Cenvatable ? What will happen for partial reverse charge, say for Manpower Supply service ? which part is Cenvatable - provider's part or recipient's part or whole ?

[Shivshankar Mishra]

Dear Rajeevji,

Eligibility of Cenvat credit of service tax is to be decided with reference to the definition of input service under the Cenvat Credit Rule, 2004.  Normally, the services provided by Directors should be an eligible input service for a manufacturer or a service provider and Cenvat Credit of same would normally be available subject to other conditions being fulfilled as per Cenvat Credit Rule, 2004.

AI Summary

Service Tax Not Applicable to Executive Directors' Salaries; Non-Executive Directors' Fees Subject to Reverse Charge. A discussion forum addresses whether service tax applies to directors' salaries. It is clarified that service tax does not apply to salaries of executive directors, as they are employees. However, non-executive directors' fees and commissions are subject to service tax under reverse charge, with the company responsible for payment. The Ministry of Corporate Affairs specifies that any increase in remuneration due to service tax on non-whole time directors does not require government approval, even if it exceeds profit limits. The applicability of Cenvat credit for service tax paid by companies is also discussed, indicating potential eligibility under certain conditions.