A recent ruling of the Rajasthan GST Authority for Advance Ruling in relation to goods and service tax liability on remuneration to company directors has come up for debate.
The reasoning in this ruling lays down a legal principle relying upon company law in terms of duties and responsibilities of a director. Such interdependence on interpretation of fiscal laws is not uncommon. The dispute in this case was on the nature of remuneration derived by a company’s director and its taxability under GST.
Before adverting to the dispute, it is expedient to note certain facets of the GST law. There is an outright statutory exclusion from GST of consideration received by an employee for his services. There is also a specific provision, albeit not under the GST law as such, but, under a subordinate notification, which provides that the GST liability on the services provided by a director shall be upon the recipient company on reverse charge basis. A similar provision was prevalent under the Service Tax law.
The applicant, Clay Craft India, submitted a question before the AAR seeking to ascertain the liability on the salary paid to its (executive) directors. It was specifically highlighted that such amounts were booked under the head salary and in fact, the directors paid tax on such amount under the head of salary income. The Applicant also relied upon a recent circular clarifying that salary paid to senior executives was not subject to GST. The Applicant further made a reference to other fiscal laws, such as the Companies Act, Provident Fund law, etc., to impress upon the AAR that the legal relationship between the company and directors, particularly acting in an executive role, is one of employment and therefore, it was not liable to GST.
The AAR, taking a narrow view, disagreed with such interpretation, and highlighted that the GST notification was unambiguous and covered any payment made to a director as being subject to GST on reverse charge basis.
Without adverting to the statutory provision of other laws relied on by Clay Craft, the AAR concluded that amounts payable to directors did not qualify as employment.
Giving a logical effect to the ruling, there is no fine-tuning or segregation of consideration paid to directors—in their capacity as employee or as director. However, the ruling of the AAR must be appreciated not just from a GST standpoint but also from other laws.
How Other Laws View Executive Directors
Company law experts would be quick to point out that the law and practice first require a segregation between executive and non-executive officers of the company, extending this demarcation to directors, which has led to currency of popular terms such as executive directors versus non-executive directors, independent directors, nominee directors, additional directors etc.
The former category of directors are those who are hands-on involved with the company’s affairs, whereas, the latter have a passive role, from either a point of governance (statutorily in the context of listed entities) or as representing the interest of a shareholder group; though, in either of the situations, they have no role to play in the day to day affairs. Neither do they withdraw salary in their non-executive role.
The Companies Act of 2013 considers directors as ‘key managerial personnel’ and under various provisions hold them as an ‘officer in default’ under host of fiscal, commercial and labour laws. In addition, the law specifically postulates concept of ‘whole-time director’, which includes a director in whole-time employment of the company.
Having said that, there is also a clear line of jurisprudential opinion that directors, in general, are not employees of the company. Instead, they are trustees who carry out the affairs of the company in a fiduciary company.
This principle though is applicable for all forms of directors and does not distinguish between executive and non-executive roles. This is the exact reason why the law makes elaborate provisions for appointment of directors, including their remuneration, qualification, disqualification, removal etc. For that matter, the law specifically enumerates the ‘duties of directors’ (Section 166) which corroborates this dimension as they are obliged inter alia to act in ‘good faith’ to promote the company’s objectives, including its employees and shareholders. Violation of such duties is a publishable offence under various provisions. This aspect clearly reveals that the directors are in a different situation compared to an employee simplicitor.
In the aforesaid legal sense, from a company law perspective, it is perhaps arguable that a director as an employee, in his fiduciary responsibility, is on a higher pedestal than his employment. I doubt if the fiduciary responsibility can be extended to an interpretation in a manner that a ‘contract for employment’ is read as a ‘contract for service’ and a GST fastened. This could never have been the intent of the statute, particularly since the levy of GST on employment has been specifically left out. To this extent, I do not agree with the principles set out in the ruling.
It would be equally incongruous for lawmakers to take such a view. Even if there was a doubt, the AAR ought to have read the provisions keeping in mind the principles of alternative constructions of such interpretation. An interpretation which is bound to cause hardship, inconvenience and uncertainty, as established principles of law, ought not to have been resorted to in this case.
The Supreme Court, in a catena of judgments, has dealt with liability (and role) of directors in the context of several laws. Most being in the context of draconian provisions of the Negotiable instruments Act on “cheque bouncing”. The principles laid down have been consistent – a liability can be thrusted only if it is proven that the director concerned was responsible or complicit in such action, and given that they do not play a role in day-to-day management, such liability cannot be thrusted upon them. The corollary of such principles is that executive directors are on a different footing.
The friction created by the AAR ruling is not unprecedented. I have no doubt that the ruling will be subject to higher judicial scrutiny as it steps on the dispute ladder.
The learning for the government and tax authorities is important here. Will they intervene and set it right, or will they allow this to continue?
Learning form past experiences of directors’ liability, in the context of “officer in default”, cases have reached the highest court, which could have been avoided had the government intervened. The GST levy on executive directors is one such opportunity the GST Council and CBIC should not miss to clarify.
Mukesh Butani is Founding Partner, BMR Legal. Tarun Jain – Partner, and Shankey Agarwal – Principal, at BMR Legal assisted. The views expressed here are those of the author