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Notification No. 30
24 April, 2013 Ahmedabad :
Notification No. 30

Legally Directors are classified as employees of the Company but in practical scenario there is no doubt that such Directors are the de facto owners of the company. Various monetary benefits received by the directors are becoming a contentious issue under Service Tax provisions. As per the definition of “Service", the services provided by an employee to the employer in the course of or in relation to his employment would not attract Service Tax. If the Director is an employee of the Company, the consideration received for providing service in the course of or in relation to such employment would not be restricted to only the salaries paid to such Directors. Hence, even if you pay remuneration to Whole Time Director or Managing Director by way of stock options, bonus etc. and not through monthly salary will not be taxable as employer-employee relationship is there. Another important aspect needs to be understood is that for becoming employee, the director need not work for whole day, even part time employees are employees and therefore on such consideration received for part time work the reverse charge mechanism would not be applicable.

The Government has amended the Notification No. 30/2012-ST dated 20.06.2012 by issue of Notification No. 45/2012-ST dated 07.08.2012 and notified that ‘in respect of services provided or agreed to be provided by a Director of a Company to the said Company’, the entire Service Tax liability on such services would be borne by the Company. Now the controversy arises that whether service provided by director per se is taxable under Reverse Charge Mechanism or only if services provided by director in his capacity as a director would be taxable? For example if director is renting a property to the company, it is not a director services, such services of renting not provided as a director, who is liable to pay tax, a director or the company.

Many companies face an issue, that they are not big company and therefore, neither company’s nor director’s total value of taxable services is more than Rs.10 Lakhs. Is the company liable to pay service tax? The answer would be yes as the provisions relating to exemption available to small service provider is not applicable to service receiver. Thus, the company would be liable to pay Service Tax.

Another practical difficulty faced by many people is that while filing service tax return the company is registered as a service receiver, but they are not able to find ‘directors service’ in the list of taxable activities. The board has not clarified anything, but as it was not specified service prior to introduction of negative list, such details can be shown under the head ‘Other than negative list service’. It should be kept in mind that Cenvat Credit cannot be utilised for payment of service tax in respect of services where the person liable to pay tax is the service recipient, hence service tax must be paid for director’s services through challan only. However the credit of the same would be available, provided company provides taxable output service or manufactures dutiable goods.

It has been practice of most organisation that for booking of expenses they pass the entries even when the expenses are not paid for long time, there is no problem under Income Tax Act, however if such expense relates to services of director then the company should keep in mind the aspect of point of taxation. Hence if payment is not made to directors within 6 months, then service tax becomes payable immediately as per the Rule 7 of the Point of Taxation Rules, 2011.

There are so many gray areas in reverse charge mechanism; the board needs to come out with a detailed circular to iron out such flaws, to facilitate the smooth operation of law.

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Courtesy: From the desk of Monish Bhalla, Founder, www.servicetaxonline.com
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