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September 27, 2024

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RCM on Director's Remuneration under GST

When it comes to the Goods and Service Tax (GST) framework, the Reverse Senior Clause (RSM) equally remains a key component as it transfers the tax burden that was incurred by the provider of services to the beneficiary of trade. However, RSM is quite frequently applied to the remuneration of directors. Companies disbursing remuneration to directors have to appreciate how RSM will affect GST on these payments and how compliance will be maintained.

We will appraise the content of the RCM on the director's remuneration and the types that it covers, GST application and compliance obligations for the companies.

What is the Reverse Charge Mechanism (RCM)?

Reverse Charge Mechanism is a feature of the GST whereby the tax is normally levied on the provider of service and instead, the service recipient is the one paying the tax. Normally, the service-providing entity has the obligation or liability of collecting and paying over the tax head charged on the services rendered. However, the RCM requires the customer of the service (which is a company in the situation) to pay the service tax directly to the revenue.

RCM is 'applied', especially in situations where the supplier is not registered for services or where there are particular services which attract the attention of services such as that offered by directors.

Director’s Remuneration and GST Applicability

The director’s remuneration may be defined as the amounts that a company settles with its directors about the provision of its services. Directors are an important part of running a company; their remuneration can be in the form of salaries, fees, commissions, or other forms of remuneration.

As per GST law also there are instances where a director’s remuneration can be treated differently depending on the nature of payment. Certain payments attract GST under RCM, and some payments fall outside the GST purview, and these two need to be separated.

Two Categories of Director’s Remuneration

Remuneration as an Employee (Salary)

If a director is a member of the company (i.e. he is a bounded executive director) and receives a Salary that is under TDS Section 192, such payment is classified as a salary and will exclude the Value Added Tax (VAT). The reason for this is that the rendering of services by an employee to an employer is out of the scope of GST.

Remuneration as a Non-Employee (Professional Fee or Commission)

In such instances, if a director has provided professional services for which he receives any fees, commission or any other amount liable for TDS under Section 194J of the Income Tax Act i.e., professional fees, are in reach of this definition. Hence, the provision of RCM arises and therefore the company is liable to discharge GST on the amount remitted to the director as remuneration.

Applicability of RCM on Director’s Remuneration

RCM has been observed in circumstances about the payment of a director’s remuneration when the director is not a staff member of the company. The company that receives the services is obligated to discharge GST on payments made to the directors in RCM.

RCM on: Fees, Commissions, Sitting Fees

Director’s Fees and Commission: These types of payments include those extended to external agencies such as independent directors about their duties or Roles in the company and the Sinking fee is classified under RCM. The company is required to meet the pressure of calculating the GST on this type of remuneration.

Sitting Fees: Directors often receive sitting fees for attending board meetings. Sitting fees are included in the taxable turnover of a business and subject to GST and the business is liable to discharge GST under the provisions of RCM for such sitting fees.

No RCM on Salary for Employee-Directors

The Salary paid to Executive Directors: where the director is employed by the company and performs duties for which he is paid a salary, the RCM is not applicable in this case. Such income is treated as a salary and thus is not subject to GST.

‍GST Rates for Director’s Remuneration under RCM

The GST rate applicable to services provided by directors under RCM is the standard rate of 18%. This applies to all types of taxable payments made to directors, such as fees, commissions, or sitting fees.

Breakdown of GST Rates:

CGST: 9%

SGST/UTGST: 9%

IGST (for inter-state transactions): 18%

If the director’s remuneration falls under the intra-state supply of services, CGST and SGST will apply at 9% each. For inter-state transactions, IGST will apply at 18%.

Compliance Requirements for RCM on Director’s Remuneration

There are certain compliance requirements that all businesses going for paying DR under RCM need to comply with so that no penalties or discrepancies in GST returns garner their filings. The compliance requirements are stated hereinafter:

Self-Invoicing

Under RCM the company shall raise a self-invoice on receiving the service from the director. Such a self-invoice should have all particulars like the name of the director, the nature of service provided and the GST applicable.

Payment of GST

The onus of computing and remitting the GST on the director’s remuneration is that of the company. The payment of the tax to the government should be done in the required time frame mostly for monthly fillers before the 20th day of the succeeding month.

Filing of GSTR-3B

The company also has to declare its RCM GST liability in GSTR-3B. The relative details concerning the director’s remuneration, the GST amount paid with a self-invoice, and the taxable period for the said period must be included in the return.

Claiming Input Tax Credit (ITC)

The company is free to apply for Input Tax Credit (ITC) of the GST paid under RCM for the directors’ remuneration subject to the fact that the services are rendered on business activity. Such ITC can be utilized to reduce the output tax liability of the company.

Maintenance of Records

It is a legal requirement for businesses to keep records of the remuneration received by company directors and the GST paid under the Reverse Charge Mechanism. These are internal invoices, payments, and tax forms and all must be submitted for G.S.T. audits if asked.

Scenarios for RCM on Director’s Remuneration

To further appreciate this subject on RCM on director’s remuneration, illustrative instances will be presented:

Fees Paid to Independent Directors

A company pays an independent director ₹50,000 as a sitting fee for attending board meetings. The payment falls under RCM here since the director is not an employee and payment for RCM must be made. In this case, the Company has to charge GST of 18% on this ₹50,000 and also needs to supply an additional amount for sitting fees for board meetings i.e. ₹9,000.

Commission Paid to Non-Executive Director

A non-executive director is entitled to a commission of rupees one lakh for service in the firm. The company is required to remit taxes because RCM is now at 18% which is computed at 18,000. Credit can be sought by the company on the GST which was paid.

Salary Paid to Executive Director

A monthly salary of ₹1,50,000 is paid to an executive director who is an employee of the company. This being a salary payment recouped under TDS section 192, they do not attract G.S.T. or RCM.

Impact of RCM on Businesses

Implementing RCM on director’s remuneration has several implications for companies:

Increased compliance burden

It must be understood that putting RCM on organizations’ board of directors’ remuneration has various implications for firms. To achieve the desired audit outcome, companies should adhere to said guidelines, which would incorporate self-billing, RCM payment of GST, and/or RCM filing of GST returns. That increases the burden of administration in the management of the application of the GST.

Cash flow impact

This is likely to have an impact on cash flows in the short term since companies are required to pay GST on directors’ salaries encased under RCM. This is however reversible by way of claiming ITC on the GST paid.

Audit and penalties

There are also consequences of noncompliance with payment of RCM. In this case, such noncompliance is likened to the payment of penalties for violation of GST, late payment interests, or being subjected to higher levels of scrutiny concerning GST regarding audit compliances. Therefore, it is essential that the taxpayer’s filing of GST returns is consistent with the deferred RCM by companies for declarable directorial remuneration.

Conclusion

RCM for remuneration of directors as envisioned under GST law requires all companies to pay GST on the named fees, commissions or payments to non-executive directors of the company. Corporations need to understand limitations for applicability and compliance with RCM and GSST to avoid penalties and normal functioning.

Through the use of proper self-invoicing, timely payment of GST, and filing returns companies are sure of complying with the laws of GST and also utilizing their tax liabilities through Input Tax Credit (ITC).

FAQs

When does RCM apply to the director’s remuneration under GST?

RCM applies to a director’s remuneration when he earns fees, commission or sitting fees but does not work as an employee in the company. The company makes itself liable to pay GST under RCM.

Is salary paid to a director under RCM?

Inappropriate, because, if a director is considered to be in employment and reasonably paid a salary that is covered by TDS under Section 192 of the Income Tax Act, then RCM does not apply, and consequently, there will be no GST payable.

What is the GST rate for a director’s remuneration under RCM?

The GST is applicable on the remuneration of the director under the RCM is eighteen per cent.

Can companies claim ITC on GST paid under RCM for director’s remuneration?

Yes, the companies are allowed to take Input Tax Credit on taxes paid under RCM, only to the extent the director’s services are utilized in the course of the business.

How should companies report RCM on director’s remuneration in GSTR-3B?

Supervisors are expected to declare the GST tax liability under RCM in GSTR-3B supported with the directors' reimbursement details and a self-invoice raised for the same service.

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