Press Information Bureau

Government of India

Ministry of Corporate Affairs

17-August-2012 15:42 IST

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

The Ministry of Corporate Affairs has 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 of 1% or 3% of the profit {u/s Section 309 (4)} of the Company, as the case may be, in the financial year 2012-13.

It may be noted that 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, until now, this situation required prior approval of Central Government u/s 309 and 310 of the Act.

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Service tax on directors' commission: company-paid tax need not trigger central approval under companies act remuneration limits. The Ministry clarified that increases in Non Whole Time Directors' remuneration solely because the company pays service tax on commission will not require prior Central Government approval under sections 309 and 310 of the Companies Act, even if such payment causes remuneration to exceed the statutory percentage limits; company paid service tax is treated as part of remuneration under section 198, and Non Whole Time Directors are not in the exempted list for service tax.