11 Jun 2020
In our update dated 18 May 2020 (accessible here), we had analysed a ruling of the Karnataka Authority for Advance Ruling (AAR) on the issue of applicability of the Goods and Services Tax (GST) on remuneration paid to directors of a company. The AAR had distinguished between different types of directors and held that GST would not be applicable on remuneration paid to executive directors as they are employees of the company. In the case of non-executive or independent directors, remuneration would be subject to GST on a reverse charge basis[1].
This ruling acknowledged the distinction between different types of directors and laid down the correct guiding principles regarding the taxability of remuneration paid to directors. However, due to the inherent limitation of AAR rulings being binding on the specific applicant only and the presence of other contrary rulings, this issue was not settled.
The Central Board of Indirect Taxes and Customs (CBIC) has now addressed this issue through its circular[2] dated 10 June 2020 (Circular). The Circular clarifies that:
The Circular is a welcome move by the CBIC as it brings certainty to the issue. Further, compliance burden on directors would be eased as GST would be paid by companies under a reverse charge basis.
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