In the normal GST system, it’s the responsibility of the supplier of goods and/or services to charge and collect the tax as per the GST law from the recipient and deposit the same with the government. In Reverse Charge Mechanism (RCM), the responsibility for paying the tax shifts from the supplier to the recipient of the goods and/or services.
Reverse charge mechanism (RCM) is applicable to services supplied by a director of a company or a body corporate to the said company or the body corporate.
In this case, the company or body corporate located in the taxable territory is required to pay GST under reverse charge mechanism (RCM).
As per schedule III, any services rendered by an employee to the employer in course of or in relation to his/her employment is absolutely beyond the purview of supply under GST law.
Therefore, the salary received by a whole time director including managing directors, who is working as an employee of the company, is outside the purview of supply under GST law.
How about remuneration received by an independent director? In this regard, the department has clarified that remuneration paid by the company to the independent directors or those directors who are not the employee of the said company is chargeable to tax under GST.
This means, in respect of those directors who are not the employees of the company, the services provided by them to the company, in lieu of remuneration as the consideration for the said services, are taxable under GST law.
As it is taxable under GST, the company is liable to discharge the applicable GST on it on a reverse charge basis.
When a director is providing his or her services as an employee on which deduction of tax (TDS) under section 192 of the income tax act, 1962 is applicable, remuneration received for such services are neither covered under the forward charge mechanism (FCM) nor Reverse Charge Mechanism (RCM).
If there is no employee and employer relationship for the services rendered to the company, then reverse charge mechanism (RCM) will be applicable for the services supplied by the director. In such a case, the company or body corporate who receive such services are required to pay GST under reverse charge mechanism (RCM).
Now the question arises, whether services supplied by the director of a company in his personal capacity such as renting of immovable property to the company or body corporate are subject to the Reverse Charge mechanism?
In this regard, a circular has been issued dated 01/08/2023 (Circular No. 201/13/2023-GST).
As per the circular, Entry No. 6 of notification No. 13/2017 CTR dated 28.06.2017 provides that tax on services supplied by director of a company or a body corporate to the said company or the body corporate shall be paid by the company or the body corporate under Reverse Charge Mechanism.
It is hereby clarified that services supplied by a director of a company or body corporate to the company or body corporate in his private or personal capacity such as services supplied by way of renting of immovable property to the company or body corporate are not taxable under RCM. Only those services supplied by director of company or body corporate, which are supplied by him as or in the capacity of director of that company or body corporate shall be taxable under RCM in the hands of the company or body corporate under notification No. 13/2017-CTR (Sl. No. 6) dated 28.06.2017.
The recipient who pays the tax under Reverse Charge Mechanism (RCM) will be eligible to claim Input Tax Credit on the tax paid, provided they meet all the conditions specified under GST laws.
The recipient is also required to report the transactions covered under Reverse Charge Mechanism (RCM) in their GST returns.
Also Read: Which income tax return form (ITR) a company director should file with income tax authorities?
