A Private Company has one Executive Director i.e. Whole Time Director and two Non-Executive Directors. The Whole Time Director holds 90% of the paid-up share capital in the company while the other 10% is held by five shareholders. A monthly fixed fee is paid as remuneration to the Whole Time Director and the other two Non-Executive Directors are paid commission and sitting fees for attending board/committee meetings.
Query 1: Is service tax applicable on services provided by Directors in case of Private Companies?
With the advent of Negative list scheme from July 1, 2012, all services, except those specified in the negative list scheme are subject to service tax. According to the definition of Service, it does not include ‘service provided by an employee to an employer in the course of employment’.
As per the explanation given in Section 269 of the Companies Act, a Whole Time Director includes a Director in the whole time employment of the company.
A Non-Executive Director is a director who is not a part of the executive team and typically does not take part in the day-to-day management of the organisation, but is involved in policy making and planning exercises.
Hence the directors, who are not in the whole time employment of the company, are subjected to service tax and no distinction is drawn between services provided by the directors of a private company and a public company.
Query 2: Since the Whole Time Director has full control over the affairs of the company and 90% of the paid-up share capital, does an employee- employer relationship exists between the Director and the company for the payment of service tax?
Every employee-employer relationship is dependent upon the nature and characteristic of appointment and the terms and conditions or other provisions contained in the memorandum and articles of association.
Hence, if the Board of Directors of a company appoints a person as a Whole Time Director for managing affairs of the company, by fixing his remuneration in accordance with memorandum and articles of association, there exists an employee-employer relationship.
Query 3: If the remuneration is paid to the directors in the form of commission, bonus, share in profits or ESOPs, would the service tax be applicable in such cases?
Once an employee- employer relationship is established between the director and company, the remuneration paid in any manner wouldn’t change the nature of the service.
In case of the executive directors who are in full time employment of the company, the remuneration paid in any form is not liable to service tax and in the case of the non-executive directors, there is no such employee-employer relationship and so the gross amount paid in the form of commission, bonus, share in profits, ESOPs etc. would be liable to service tax.
Query 4: Who is liable to pay service tax on the director’s services?
The director’s services are covered under the service tax gamut from July 1, 2012. As per the Notification No. 45/2012-ST, from August 7, 2012, this service will be covered in the reverse charge provisions and hence the company is now liable to pay service tax on the director’s services. Thus for the period between July 1 and August 6, the directors are liable to pay tax in case their income is more than INR 10 lacs per annum.
Query 5: When is the company required to pay service tax on services received from Non-Executive Directors?
As the company is covered under the reverse charge provisions for the payment of directors’ services, it is required to pay service tax on payment basis with effect from August 7, 2012.
The views expressed by the author are personal and purely for informational purposes. These should not be considered as a substitute for professional advice.
Priyanka is a Chartered Accountant and runs ServiceTaxAid.com. She can be reached at priyankagargca@gmail.com.
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