Directors’ remuneration- service tax liability is now on the company.

Contributed by Ca. Subhansis Banerjee

Position upto June 30, 2012

Applicability of service tax on remuneration paid to non-executive director (NED), be it as sitting fee, commission or in any other form was a controversial topic under the erstwhile service tax regime.

Before June 30,2012, only selected category of services were liable to service tax andas a result of which, sitting fee, commission or any other form of remuneration if it was for rendering taxable service, question of imposition of service tax was being discussed.

Position from July 1 to August 6, 2012

The definition of service { Sec 66B(44)} under new service tax regime has made it amply clear that any activity performed by a director ( except as an employee) for consideration is liable to service tax with effect from July 1, 2012.

This aspect is being reiteratedby Central Board of Excise & Customs (CBEC) on 13.07.2012, in its presentation clarifying that payment to Directors is taxable and is applicable to all kinds of directors except of government regulatory bodies.

It covers Any monetary or no-monetary consideration Directors’ fee, commission / bonus, company car/ travel reimbursements etc Thus the services performed by a director (other than Managing Director/Executive Director/ Wholetime Director if they are treated as employees of the Company) of a company fall within the ambit of taxable services with effect from 1st July, 2012.

Implication on NED

Because of such change, NED is liable to deposit service tax on remuneration (monetary as well as non-monetary) received from company if the gross service income of NED during the financial year exceeds Rs. 10 lakhs.

Non-monetary consideration such as use of company car, phone or accommodation is required to be valued as per the Valuation Rules and NED is required to comply with all the applicable provision of the service tax law.

Implication on Company
In case of any payment to NED, located outside India, company is required to pay service tax under reverse charge basis and thresh hold limit of Rs. 10 lakhs will not be applicable on such case.
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.

Position from August 7, 2012 onwards
Central Board of Excise and Customs have come out with a notification (Notification No. 46/2012) on August 7, 2012, stating that the company is liable to pay service tax as recipient of service on remuneration paid to NED.

Impact of the Notification

  • Company will be liable to pay service tax on any remuneration paid to NED whether in the form of money or otherwise.
  • NED is not required to pay service tax henceforth.
  • No thresh hold limit will be applicable to company. In other words, even if the payment is Rs.1, company is required to pay service tax on the same.
  • Company is required to comply with all the necessary compliances, such as obtaining service tax registration, payment of service tax, filing of tax return as applicable under the service tax law.
  • Company may be required to take permission under company law, because of service tax,if total remuneration to NED exceed the approved amount.
  • For a trading company service tax so paid as recipient of service, will be cost to the company.
  • For non-trading company service tax so paid may be available as credit if it qualifies as eligible input service.

Open Issue

In the absence of mention of any date in the notification, it shall be effective from the date of publication in the official gazette. Notification No. 46/2012, empowering company to pay tax under reverse charge basis was published in the official gazette on August 7, 2012. Accordingly, Notification No. 46/2012 should be effective from August 7, 2012, the date when the same was published in the Official Gazette. Considering the said fact, can company take a position that payment of remuneration to NED will be subject to tax at their end only from August 7, 2012, onwards?

Way forward

  • Any payment to NED needs to be scrutinised from the perspective of service tax.
  • Service rendered prior to August 7 but payment is made after August 7, the liability is required to be determined as per Point of Taxation Rules
  • Taxable value of non-monetary remuneration is required to be ascertained as per Service Tax Valuation Rules.
  • Eligibility of cenvat credit in respect of service tax so paid by the company as recipient of service needs to be examined on cases to case basis.