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Advocate Ashish Ranjan Samal (Advocate)     05 October 2012

Service tax on directors remunaration

Service tax is payable on services provided by directors to the company w.e.f. 1-7-2012. Reverse charge provisions have been made applicable to the remuneration paid by company to directors w.e.f. 7-8-2012, making company liable to pay service tax on such remuneration paid to their directors. Following FAQ is based on various queries received on Taxman’s Query Board.

 1. Taxability

Is service tax applicable on services provided by all directors to the company w.e.f. 1-7-2012?

Service tax is payable on services provided by non-executive, nominee and independent directors to the company w.e.f. 1-7-2012. Service tax is not payable in case of Managing Director or wholetime director or executive director, if the director is in full time employment of the company.

Why there is no service tax in case of wholetime director in employment of company?

Section 65B(44)  of Finance Act, 1994 as introduced w.e.f. 1-7-2012 reads as follows – “Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include— (a) – - (b) a provision of service by an employee to the employer in the course of or in relation to his employment (c) – - .

Thus, services provided by employee to employer have been excluded from the definition of ‘service’ itself.

The rules and notifications relating to reverse charge merely state ‘service provided or agreed to be provided by director to the said company’. The provisions do not distinguish between wholetime director or part time director. Then why reverse charge would not apply in case of wholetime director?

It is true that rule 2(1)(d)(EE) of Service Tax Rules inserted w.e.f. 7-8-2012 use the words ‘in relation to service provided or agreed to be provided by a director of a company to the said company, the recipient of such service; shall be person liable for paying service tax.

Notification No. 30/2012-ST dated 20-6-2012 makes provisions relating to reverse charge. Para 1(A)(iva) of Notification No. 30/2012-ST dated 20-6-2012 (as amended w.e.f. 7-8-2012)also uses the same words.

Reverse charge provisions can apply only if a service is otherwise taxable. If a service is not taxable, it cannot be made subject to service tax, as reverse charge provisions are only for collection and payment of service tax. The reverse charge provisions cannot create a service tax liability which is not there under service tax provisions.

Hence, if there is employee-employer relation, then there is no service tax and hence no question of reverse charge can arise.

We pay remuneration to wholetime director and executive director by way of commission, stock options, performance related bonus etc. and not through monthly salary. Would service tax be payable in such case?

Once there is employer-employee relation, mode of payment will not alter the nature of service.

CBE&C, vide letter No. 324/Comm(ST)/2008 dated 1-12-2008 [20 STT 20 (St)], has clarified that commission paid by company to its directors (even if linked with performance or with financial results of the company) is nothing but remuneration paid by employer to employee. The relationship between employer and employee is distinct from relation between a service receiver and service provider. Hence, so long as activities performed are duties within the framework of terms of employment, amount paid by employer to employee, even if termed as commission, would not be treated as commission under definition of Business Auxiliary Service and service tax would not be leviable.

This view has been reiterated and confirmed vide CBE&C circular No. 115/09/2009-ST dated31-7-2009.

These clarifications would apply even under new provisions w.e.f. 1-7-2012.

2. Valuation

In case of remuneration paid to non-wholetime and non-executive directors, on what amount service tax will be payable?

Service tax will be payable on sitting fees paid to directors for attending meetings of Board and Committees of Board, travelling expenses and incidental expenses for attending meetings of Board and their committees., commission or other remuneration paid, if any.

Would service tax be payable if stock options are offered to non-executive and non-wholetime  directors?

It is well settled that ‘consideration’ for a service can be in any form. It need not be in money form. Hence, if stock options are offered to such directors, in my view, service tax will be payable on basis of value of such benefit.

How such stock options should be valued?

In my view, the stock options can be valued on the basis of provisions contained in Income Tax Act.

In addition to attending meetings of Board and committees of Board, sometimes, directors are required to travel for attending meetings, sales conferences etc. in connection with business of the company. Would service tax be payable on such expenses?

These reimbursement of expenses are not part of his remuneration as a director and service tax would not apply. However, if some separate payment is made to the non-wholetime and non-executive director to attend such meetings, service tax will be payable on such amount.

The service tax should be paid @ 12.36% on gross value of services or the amount paid to director should be taken as inclusive of service tax and then back calculations should be paid for payment of service tax?

In my view, service tax is payable on the entire amount paid to service provider and not by making back calculations.

The reason is that the service receiver is basically discharging the liability of service provider. If the service provider was liable to pay service tax, he would have charged the entire amount of service tax in his invoice and then paid it to Government. For example, if his value of service was ` 100, he would have charged ` 112.36 and the service receiver would have paid him ` 112.36.

Instead of that, the service receiver is paying ` 100 to the service provider and ` 12.36 to Government (the service tax which would have been normally paid by service provider).

3. Reverse Charge

Who is payable to service tax on services provided by directors to the company?

As per rule 2(1)(d)(EE) of Service Tax Rules inserted w.e.f. 7-8-2012 and Notification No. 30/2012-ST dated 20-6-2012 amended w.e.f. 7-8-2012, company receiving the services of directors is liable to pay service tax under reverse charge mechanism.

The remuneration paid to the director is less than Rs 10 lakhs per annum. Is the company liable to pay service tax under reverse charge?

Proviso (ii) to Para 1 of the Notification No. 33/2012-ST dated 20-6-2012 which provides for exemption to small service providers having value of taxable service less than specified limit states that nothing in this notification shall apply to such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules,1994.

Thus threshold exemption of ` ten lakhs is not applicable in cases where the service receiver is liable to pay service tax under reverse charge method, as per provisions of section 68(2) read with rule 2(d) of Service Tax Rules..

In short, company will still be liable to pay service tax.

Our company is a small company. Our total value of taxable services including remuneration paid to non-executive directors is less than Rs 10 lakhs per annum. Is the company liable to pay service tax?

As stated above, the provisions relating to exemption available to small service provider are not applicable when service tax is payable by service receiver under reverse charge. Hence, the company would still be liable to pay service tax.

One of our non-executive directors is offering management consultancy services to the company for which he raises separate bill. Would the company liable to pay service tax under reverse charge mechanism?

The words used in the rule are ‘by a director of a company to the said company’ and not ‘by a person who is director of a company’. The fair interpretation is that only services provided by such person in the capacity of a director would be subject to reverse charge. If such person provides service to company in some other capacity, it cannot be said that the service is provided by a ‘director’ to the company. In such case, he himself would be liable to pay service tax on such services. (Though I agree that issue is litigation prone).

The reverse charge was made applicable w.e.f. 7-8-2012. What about period between 1-7-2012 to 7-8-2012?

Legally, the director is individually liable to pay service tax during this period. If he was not providing any other taxable service, he can claim exemption from service tax for that period. Otherwise, he should issue invoice to company, charge and pay service tax.

Can company pay service tax on behalf of director during the period 1-7-2012 to 7-8-2012 instead of requesting him to register and pay service tax for such short period?

Any provision in rule or notification cannot have retrospective effect. Strictly going by law, it is his liability to pay service tax during that period.

As stated above, the director can claim exemption of first 10 lakhs during this period

Logically, there should be no objection if company discharges the liability of service tax of directors during the period 1-7-2012 to 7-8-2012 and hopefully, the excise officers would take a practical view. However, if the officer is nasty, he can insist that director himself should pay the service tax for the period 1-7-2012 to 7-8-2012..

I am sure that CESTAT (Tribunal) will surely take a practical and pragmatic view and will not insist on double payment, particularly because assessee can avail Cenvat credit of such service tax paid.

However, it is true that law and logic does not always go together. What is logical may not be legal and what is legal may not be logical.

4. Other issues

Is director required to issue an invoice to the company?

In my view, he need not issue any invoice.

It is true that rule 4A of Service Tax Rules states that every person providing taxable service shall issue an invoice within 30 days giving prescribed details, including service tax payable. However, this rule cannot be raid in isolation. It has to be read with other provisions in law.

Rule 3(1) of Service Tax Rules states that every person liable to paying service tax shall apply for registration within 30 days. Provisions pertaining to service tax start after applying on registration. Thus, remaining rules apply only to a person who is registered under service tax. In other words, rule 4A applies only to person registered under service tax.

Further, as per section 73A(2) of Finance Act, 1994, where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government.

Thus, if any amount is collected representing as service tax, it will be required to be deposited with Government. Considering this provision, it can be said if director issues invoice indicating service tax, but does not pay it to Government, it will be in violation of section 73A(2) of Finance Act, 1994.

Indeed the director cannot issue invoice under rule 4A as that rule requires that service tax payable should be shown in the invoice, which cannot be done in view of provisions of section 73A(2) of Finance Act, 1994.

The company has sufficient Cenvat credit available. Can the service tax payable on director’s remuneration be paid through Cenvat credit?

Cenvat Credit cannot be utilised for payment of service tax in respect of services where the person liable to pay tax is the service recipient [Explanation to rule 3(4) of Cenvat Credit Rules, inserted w.e.f. 1-7-2012]. [even earlier, it was not allowable]

Thus, the service tax is payable by cash only.

Can company take Cenvat credit of service tax paid under reverse charge?

It is well settled that Board of Directors are entrusted with task of overall administration of a company.

The Definition of Input Service as contained in rule 2(l) of Cenvat Credit Rules includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, procurement of inputs, accounting, auditing, financing, recruitment and quality control etc.

All these services are certainly related to administration of a company. Hence, in my view, the company will be eligible to avail Cenvat credit of service tax paid on remuneration paid to directors.

It is well settled that the term ‘includes’ expands the scope of the definition. It is also settled ‘in relation to’ is a broad term. It is expansive and not restrictive [The term ‘means’ is restrictive].

What would be the eligible document for availing Cenvat credit?

The assessee paying service tax under reverse charge method will be eligible to avail Cenvat credit of the service tax paid, on the basis of GAR-7 challan (earlier TR-6 challan) by which the tax is paid [Rule 9(1)(e) of Cenvat Credit Rules, as amended w.e.f. 1-5-2006]. The assessee should pay service tax in cash i.e. without utilising Cenvat credit.

Would payment of service tax affect provisions in Company Law relating to managerial remuneration?

The Ministry of Corporate Affairs has clarified vide General Circular No. 24/2012 dated August 9, 2012 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 of the company, as the case may be, in the financial year 2012-13.

This means that such approval will be required after 1-4-2013.

e mail : advocate.ashish@odiamail.com /  advocate2010@india.com



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