GST Update on Kar AAR on Director's Remuneration #37/2020

The havoc created by the advance ruling pronounced by the Rajasthan AAR in the case of M/s Clay Crafts India Pvt. Ltd. is the most vibrant topics for discussion amongst the companies as it ruled that GST is liable to be paid by the companies even on remuneration paid to its directors under reverse charge mechanism contending that directors are not employees of the company. The AAR while pronouncing adverse decision had also not considered various other facts such as TDS deducted under section 192 of Income Tax Act, directors reporting such remuneration under “Income from salary” and other provisions such as EPF, ESI. Although, this is not the first time wherein pro-revenue opinion has been affirmed by the Advance Ruling but the decision created much hype. However, within a short span of time, the Advance Ruling Authority of Karnataka pronounced a contrary ruling in the case of M/s ANIL KUMAR AGARWAL [2020-VIL-118-AAR]. The conclusion arrived at in the decision of M/s ANIL KUMAR AGARWAL is the subject matter of discussion of the present update.
Although the ruling did not pronounce detailed ruling on the applicability of GST on remuneration paid to directors but the decision given indicates favourable opinion for the assessees on the said issue. The applicant, M/s ANIL KUMAR AGARWAL sought AAR in respect to the following questions:-

i) Whether various incomes such as partner’s salary, salary in the capacity of director, interest on various deposits, rent received for commercial and residential property, capital gain/loss on sale of shares shall be considered for Aggregate Turnover for the purpose of registration under GST?

ii)Out of given nature of income / revenue, when the supply, even if exempted, need to be considered?

Out of the many sources of income pointed out, our discussion would be restricted to inclusion of “Salary received as Director from Private Limited company”in the aggregate turnover for the purpose of registration requirement of the applicant.
The Authority has stated that there are two possibilities with the amount received by the applicant as Director which are as follows:-

Amount received as Executive Director: The AAR has pronounced that Services provided as Executive Director by the applicant are as an employee to the employer and not to be treated as supply of services as per Schedule III of CGST Act 2017. Hence, such amount would not form part of aggregate turnover for the purpose of determining liability to get registration under GST.
Amount received as Non-Executive Director: The applicant is a nominated director and the services provided in the nature of Non-Executive director is liable to tax under RCM in the hands of the company. This has been pronounced on the basis of the entry No. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017. Hence, it will be included in the aggregate turnover for determining liability to get registration under GST.

Therefore, the AAR distinguished the liability to pay GST on the remuneration paid to the directors on the criteria of director being executive/non-executive. However, one important point to be noted is that the AAR has affirmed that the executive directors engaged in managing day to day affairs of the company are employees and are covered by entry no. 1 of the Schedule III to the CGST Act, 2017
Now, the question arises is that what course of action is expected from the assessees. It is very much clear that the advance ruling is binding only on the applicant and the jurisdictional officer and has only persuasive value for other assessees. Nonetheless, it is a matter of discussion as the Authority for Advance Ruling of two different states have pronounced two different rulings on the same matter. The National Appellate Authority for Advance Ruling for deciding on conflicting rulings pronounced by AARs has not been constituted till date and is not operational. Consequently, such contrary rulings are adding to confusion amongst the taxpayers and it is hoped that clarification in this regard is issued soon so that unwarranted dispute may be put to rest.

This is solely for educational purpose.
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GST Update on Kar AAR on Director's Remuneration #37/2020

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