Reverse charge on director’s service: an expansion adding confusion

Reverse charge on director’s service: an expansion adding confusion

An article by:-
CA. Pradeep Jain
CA. Preeti Parihar
Kushal Shah

Preface:-
The people of India have desperately voted Modi Government for change. The verdict of this budget represented the exasperation with the status scope. The journey of complications for the applicability of tax provisions under reverse charge mechanism under “the services provided by the director to the company” is expanded widely by introducing a new word “body corporate” is explained herein.

Backdrop:-
First introduction of the reverse charge mechanism on the services provided by directors to the company was by Notification No.45/2012-Service Tax dated 6.8.2012. This notification amended the notification no. 30/2012-ST dated 20.6.2012 which prescribed the services falling under Reverse charge. By amending this basic notification, the services of director were brought under full reverse charge by adding the following clause:-
“(iva)   provided or agreed to be provided  by a director of a company to the said company;”;

Also, the table given in the said notification was amended to insert serial no. 5A which prescribed that 100% service tax shall be payable by the company for the services provided or to be provided by the director.

Thus, by virtue of this amendment, full reverse charge was applicable if the following two conditions were satisfied:-
·        The services are being provided by a DIRECTOR.
·        The services are being provided to a COMPANY.

Recent Amendment vide Budget, 2014:-
Notification no. 10/2014-ST dated 11.7.2014 has been issued to amend further the clause related to services provided by director of a company to the said company. The above referred clause (iva) of the notification no. 30/2012-ST has been substituted as follows:-
“(iva) provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate;”;
Thus, now, the reverse charge is also applicable if the services are being provided by a DIRECTOR to the BODY CORPORATE. Earlier only services provided by the director to the company were covered.

Implication of amendment:-
The recent amendment has made the reverse charge applicable on the services provided by a DIRECTOR to a BODY CORPORATE. Section 65(1) of the Finance Act defines the term body corporate as follows:-
“body corporate” shall have the meaning assigned to it in clause (7) of section 2 of the Companies Act,1956 (1 of 1956);.”

The definition of body corporate as per clause (7) of section 2 of the Companies Act, 1956 is as under:-
“ (7) "body corporate" or "corporation" includes a company incorporated outside India but does not include -
(a) a corporation sole ;
(b) a co-operative society registered under any law relating to co-operative societies ; and
(c) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification in the Official Gazette, specify in this behalf ;”
It is worth noting here that the Companies Act, 1956 has been substituted vide Companies Act, 2013. As per Section 2 of The Companies Act, 2013, the definition of body corporate is a under:-
“(11) “body corporate” or “corporation” includes a company incorporated outside
India, but does not include—
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act),which the Central Government may, by notification, specify in this behalf;”
Thus, the definition of body corporate given in Companies Act is very wide and only co-operative society and notified bodies are not included in this definition. Therefore, all the other legal entities will get covered in the definition of body corporate, accordingly, the scope of Reverse charge has been increased drastically. Many such legal entities which do not fall in the definition of company but are very well covered in the definition of “body corporate” will come under service tax net if they avail the services of director. It is worth noting here that the term ‘director’ is not defined in Finance Act or in the notification no. 30/2012-ST. Therefore, general meaning shall have to be taken. In normal parlance, director means a person who is in charge of an activity, department, or organization or a member of the board of people that manages or oversees the affairs of a business. The synonyms used for the term director are administrator, manager, chairman, chairwoman, chairperson, chair, head, chief, boss, etc.
Since the term body corporate is very widely defined and the meaning of director is not given anywhere in the service tax law, its general meaning shall have to be taken. Also, it is nowhere specified that the definition of “director” will be borrowed from Companies Act. Even if we look into the definition of director under Companies Act, it reads as follows:-

“(34) “director” means a director appointed to the Board of a company.”

Thus, director means the director appointed to the Board of the company and the board is defined as follows:-
(10) “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company;
The cumulative analysis of these two definitions makes it clear that the term director used in the Companies Act is restricted to the “directors” of a “company”.

Since now the reverse charge has been made applicable to the “body corporate” too, in our view, the definition of “director” as given in the Companies Act does not apply here. Also, the term “body corporate” is wider as it covers company incorporated outside India too. Thus, in view of this fact and due to the fact that the definition of “director” is not given in the Service tax law; it is more feasible to take its general meaning. Due to this, in our view, including the services provided by directors to the body corporate under Reverse charge has drastically increased the scope of Reverse charge.

Good Bye words:-

Tax Research Unit (TRU) has released letter no. D.O.F. No. 334/15/2014-TRU dated 10.7.2014 wherein it has been clarified at para 4.1.2 as follows:-

Service provided by a Director to a body corporate is being brought under the reverse charge mechanism; service receiver, who is a body corporate will be the person liable to pay service tax. This is in view of requests by body corporates such as the Reserve Bank of India.

Thus, the said amendment has been made in view of requests by big body corporates. However, unaware of the fact that the definition of body corporate is very wide and the term director is also not defined in the Service tax law; it is most likely that this is going to be a burning issue of future as the department will be liberal enough in interpreting the definition of “body corporate” which will bring a number of big and small assessees under service tax net which does not seem to be intention of government. We hope that the government issues a clarification soon on the interpretation of the term body corporate and inclusions therein alongwith the meaning of term “director” to be taken for the purpose reverse charge mechanism.

Comments

rengaraj on 27 October, 2014 wrote:

Dear Sirji, I do agree with CA Rakesh. rengaraj r.k advocate
CA RAKESH PRASAD on 22 August, 2014 wrote:

Expansion of Scope is really unfortunate. Hope,Lawmakers would read your article. Your practical insights make you our first point of reference. Keep it up.

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Reverse charge on director’s service: an expansion adding confusion

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