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Service tax on services to a body corporate by a director


Ambit of reverse charge mechanism introduced vide notification no. 30/2012-ST dated 20-06-12 was expanded to include services provided to a company {body corporate w.e.f. 11-07-14} by director vide notification no. 45/2012-ST. Companies are liable to pay service tax on services received from a director w.e.f. 07-08-12.




Q. Is reverse charge applicable on all companies?


Ans. Yes sub cl.(iva)  of notification covers taxable services provided by a director to the body corporate and does not bifurcate between public or closely held company.

"Body corporate" includes a company incorporated outside India but does not include –

  • a corporation sole ;
  • a registered co-operative society; and
  • any other body corporate as  notified by CG


Q. Is any threshold exemption [Rs. 10 lacs] available to company for payment of tax on director service received?


Ans. No, threshold exemption is available only to a service provider vide notification no. 33/2012-ST and no such exemption is available to company under reverse charge and is liable to pay tax on amounts paid to the director irrespective of the quantum.


Q. What portion of service tax is to be paid by company under reverse charge?


Ans. There is no provision of partial reverse charge on services provided by director and company is liable to pay entire service tax, on services received from directors w.e.f. 07-08-12.


Q. What is the nature of directorships?


Ans. As per Sec 56 of CA,1956, managing and whole time directors are executive directors and other than those are called non-executive directors.


Q. What is the nature of payments to directors?


Ans. Remuneration under Sec198 and 309 of the CA Act, 1956 can be in form of sitting fees (payable only to a non-executive director) or in the form of salary or commission.


Employee Director


Q. What is the status of an employee director?


Ans. U/s 65B(44)(b) w.e.f. 01-07-12, service means “any activity carried out by a person for another for consideration, and includes a declared service, but shall not include a provision of service by an employee to the employer in the course of or in relation to his employment”. Thus service provided by a director as an employee [managing director, whole time director] will be inter alia out of purview of service tax and thus no reverse charge will be applicable.


Q. Is it necessary that the employee director be issued a formal appointment letter?


Ans. No, the employer-employee relationship can be either through an express appointment letter or though contractual agreement or even through its articles of association. In all cases, the remuneration will be treated as salary and outside the purview of service tax.


Q. What is difference between salary and remuneration?


Ans. In case of absence of explicit contract, an indicative assessment may also be made by nature of TDS deduction by the company; in case of salary, TDS is deducted u./s 192 and in case of any other remuneration , commission, TDS is deducted u/s 194J. The explanation given by CBDT while explaining provisions of Finance Bill, 2012 are also relevant here:

“Under the existing provisions of the Income-tax Act, a company, being an employer, is required to deduct tax at the time of payment of salary to its employees including Managing director/whole time director. However, there is no specific provision for deduction of tax on the remuneration paid to a director which is not in the nature of salary. It is proposed to amend section 194J to provide that tax is required to be deducted on the remuneration paid to a director, which is not in the nature of salary, at the rate of 10% of such remuneration.”


Taxability during interim period


Q. Negative list regime is notified w.e.f. 01-07-12 and reverse charge on directors w.e.f. 07-08-12. What is the status of director services during the interim period?


Ans. Taxability on directors can be understood as follows:

Services provided by a Part-time/ Expert/ Independent/ Nominee directors, etc., (those who are not under employment with Company) to Company will be taxable from 01-07-2012 to 06-08-2012 as there was no reverse charge mechanism during stated period [subject to the benefit of threshold exemption of Rs. 10 lac u/n 33-2012-ST].

However no service tax is payable by director in following cases:

  • Fees paid to a banker for nominee director appointed by it in a company : taxable in hands of banker
  • Government Nominee director: Though Government is liable for tax it is exempted under negative list. However company liable under reverse charge on support services provided by govt.
  • Director located in non-taxable territory: Not taxable, but if company is located in taxable territory, taxable under import of services.


Procedural Compliance


Q. Is a director required to obtain registration and pay service tax for the period till 07-08-2012?


Ans. Yes, the directors will be liable to pay service tax on services provided till 07-08-2012 as a normal service provider. They may also claim benefit of threshold exemption if director services along-with other taxable services rendered are covered under the conditions specified u/n 33/2012-ST.


Q. Is a director required to issue invoice for services provided by him?


Ans. Provisions of Rule 4A of STR, 1994 provide that every person providing taxable service is required to issue an invoice within 30 days of completion of service. In case of reverse charge, though the liability of tax is of the company, it is advisable that invoice for services provided be issued to have clarity on POT provisions for the company.


Q. When is the company liable to pay service tax on director services?


Ans.  As per Rule 7 of POT Rules,2011, service tax liability on reverse charge is determined as under:


  • POT: Date of payment to the director
  • If payment not made within 6 months of invoice then POT  = Date of invoice. However w.e.f. 01-Oct-14 in case of non-payment within 3 months, POT will be immediately after completion of 3 months

The company will be liable to pay service tax within 5 days of the succeeding month.




Q. Can Cenvat credit be availed by company of service tax paid to director either on its invoice [for period till 07-08-12] or on tax paid under reverse charge?


Ans. Though admissibility of Cenvat credit depends upon provisions of Cenvat Credit Rules, 2004, they seem to be eligible credit, specifically with reference to the definition of ‘input service’.


Q. What is the document on the basis of which credit can be taken by company?


Ans. In case of tax paid by director, on the basis of director’s invoice and in case of tax paid as reverse charge, on the basis of challan evidencing payment (refer Rule 9 of CCR,2004).


Taxability of reimbursement of out of pocket expenses


Q. Will out of pocket expenses reimbursed to a director be included for the purpose of computing value of reverse charge?


Ans. Rule 5 of Valuation Rules,2006 applicable w.e.f. 19-04-2006 provides for inclusion of reimbursed expenditure incurred during the course of providing taxable services in the hands of service provider (read director). However constitutional validity of the same is struck down by Hon’ble High Court in the caser of International Consultants and Tech P Ltd 2012-TIOL-66-Del. HC. However w.e.f. 14-May-15, Sec 67 is amended to overrule the above judgment providing for taxing  reimbursements subject to the conditions laid down.


Companies Act Provision


Q. Is service tax paid under reverse charge treated as part of remuneration to non-whole time directors under Companies Act.


Ans. Sec 309 of the Companies Act stipulates that remuneration paid to Directors cannot exceed 1% profit of the company when the company has MD/ WTD/ Managers OR 3% of profit of the company if the company does not have a MD/ WTD/ Manager, as the case may be, without the approval of Central Government

The issue may arise regarding service tax paid for director services be treated as part of remuneration for computing limit of 1%/ 3% as the case may be.

The Ministry of Corporate Affairs has clarified vide Circular No. 24/2012 dated August 9, 2012 that any increase in remuneration of Non-Whole Time Director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under section 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit of the company, as the case may be, in the financial year 2012-13.