By Ankit Bhalotia ,firstname.lastname@example.org
The GST law, introduced with effect from 1st July, 2017, makes a major rejig in the indirect tax system in the country. With its introduction, several concepts have been brought up, playing with the minds of the people. One such concept that has created havoc is the reverse charge mechanism and its viding applicability. Services of director i.e. sitting fees, commission has been covered under the Government notified services on which the tax would be payable on reverse charge.
Following are the some of the pertaining questions answered in respect of GST on Director Services
1. Where does the power to levy tax on such transaction arise under GST?
The power to levy tax on reverse charge arrives from Section 9(3) of the CGST Act and Section 5(3) of the IGST Act which states that government may notify services on which reverse charge would be applicable. Vide notification dated 28th June 2017, Government had notified such services where Entry no. 6 of the same states that any services supplied by a director of a company to the said company would be covered under reverse charge. Similar services were covered in notification no. 4 dated 28th June in respect of inter-state supplies.
2. What all services of director would be covered under provision?
The word services has to be taken from the definition so provided u/s 2(102) of the CGST Act which includes any activity other than goods, money and securities for which separate consideration is charged. However, the intent of such services should be looked at the angle when such services are provided on the capacity of director. Therefore services like giving guarantee for loan taken by company, sitting fees, commission etc. would be covered.
3. Reverse charge on directors’ remuneration – is this a new provision?
The concept is not nearly as new since similar provisions could be traced from the service tax. But levy of tax on reverse charge has been a matter of paramount importance on the virtue of the bifurcation of tax on inter-state and intra-state supplies.
The question which perplexes the simple provision is the nature of tax i.e. IGST or CGST&SGST that would be charged on such reverse charge services. Determining the jurisdiction of supply has become increasingly important because, inter-state supplies are subject to IGST and intra-state supplies are subject to CGST and SGST. On contrary such difficulties could never have arisen earlier when only single centrally levied tax was charged.
4. In case of tax on reverse charge basis, the tax obligation shifts to the recipient. However, can it be said that recipient is making a self-supply to himself?
First, let us understand the meaning of the term “reverse charge”. Referring to the department GST FAQ’s the term is explained as the liability to pay tax is on the recipient of supply of goods and services instead of the supplier of such goods or services in respect of notified categories of supply. Therefore, only the liability of payment is shifted from the hands of supplier to recipient without altering the parties to transaction. The intent is to shift the burden only.
So there is no such concept of self-supply by one registered person to oneself and transaction of reverse charge remains unaltered. Further Supreme Court in M/s Rashtriya Ispat Nigam Ltd v/s Dewan Chand Ram Saran, [Civil Appeal no. 3905 of 2012] stated that “Though the appellant became the assessee due to amendment of 2000, his position is exactly the same as in respect of Sales Tax, where the seller is the assessee, and is liable to pay Sales Tax to the tax authorities, but it is open to the seller, under his contract with the buyer, to recover the Sales Tax from the buyer, and to pass on the tax burden to him.”
Further, Article 246A of the Constitution empowers the Centre and the State to levy and collect the GST on supplies of goods, or of services, or both. It does not create any new taxation system where the respective governments are empowered to levy tax on consumption of goods or services. Since GST is still a tax on supply, that principle holds well in case of RCM as well. While the tax is, therefore, still a tax on supply, the onus of discharging the tax liability has been shifted to the recipient for better compliance.
5. Is there is a fundamental distinction between RCM in case of unregistered suppliers, and RCM in case of notified supplies?
Under the GST Law, provisions related to applicability of reverse charge are governed by the Section 9(3) and Section 9(4) of the CGST Act. Therefore, there are two cases in which the RCM is applicable:
- Supplies notified by Government u/s 9(3)
- Taxable Supplies by unregistered person to registered person
However, in both cases it may be argued that the essential philosophy of RCM is to shift the tax obligation but the tax incidence is still on the supply and the tax needs to be paid in the state where supply takes place, thereupon which it would land up in the hands of destination state government.
6. Can it, therefore, be said that the principles of determination of jurisdiction and all other provisions of law remain unchanged in case of RCM?
Yes, the principles of determining the jurisdiction remain the same in case of RCM as well since the government has merely chosen the recipient of goods/services as the point of convenience from the point of view of better compliance with the law.
7. Can the notified supplies under reverse charge be inter-state?
Section 8 of the IGST Act states that where in case of a transaction, location of the supplier and place of supply are located in the same state or UT, the transaction will qualify as an intra-state transaction.
The provisions relating to inter-state supplies have been provided under section 7 of the IGST Act. As per the said section, where the location of the supplier and the place of supply are located in two different states or UTs, the transaction shall be an inter-state supply. Now since the principles governing the determination of jurisdiction remains same for supplies under RCM as well, it is quite possible that the transaction may be inter-state in character. This can further be substantiated by Section 5(3) of the IGST Act which discusses the applicability of integrated taxes on notified reverse charge supplies.
8. Can the supplies from unregistered person be inter-state?
Section 9(4) of the CGST Act, lays down that when taxable supplies are made by unregistered person to a registered person, the payment liability has to be borne by the recipient registered person.
The intent of the law is to capture supplies by those suppliers who are not required to register under Section 22 by virtue of their turnover not exceeding the threshold or otherwise provided in Section 24. The obligation to register under the law cannot be addressed by someone else discharging such obligation. However, Section 24 specifically addresses that a supplier affecting inter-state supplies need to compulsorily register irrespective of turnover so an argument can be based that the intent of law here could not have been to cover such supplies under RCM.
9. What can be the place of supply in case of director’s remuneration falling under reverse charge?
The entire concept of GST, being a destination based tax, is to tax the state where the goods/services are being consumed. The revenue should reach the hands of consumption state Government. The detailed provisions narrated in Section 12(2) of the IGST Act determines place of supply to imply the location of person where the services are received. Therefore, ideologically, the tax should be destined to the state where the service of the director is being consumed.
10. What is the place where the services of a director are being consumed?
A director services on the board of the company. The board is the apex tool of corporate governance. Therefore, one must say the place where directors’ services are being consumed is the place where the seat of corporate governance of the company is situated.
11. What is the place where the seat of corporate governance is situated?
There have been elaborate discussions worldwide in determining place of effective management (POEM) of the company. CBDT vide its Circular dated 24th January covers rules for its determination and mentions such place where key management and commercial discussions that are necessary for the conduct of the business of an entity as a whole, in substance, made. Generally speaking, the place of registered office of the company is such place. However, there are many cases where registered office is not the place from where the company is effectively governed when companies have opted to register their offices in remote locations, say factories, tea gardens, original place of its formation, etc. Therefore, in such cases, the place where most of the substantive board meetings are held or the place where the apex management is seated should be the seat of corporate governance.
12. Can it be said that the place where the particular board meeting takes place is the place where the services pertaining to the board meeting get consumed?
It is to be understood that Board meeting is not a matter of travel or tourism interest. The directors may be meeting, say at a place other than the seat of corporate governance. They may meet, for a change, at a holiday destination. However, the meeting is for discussion of matters of corporate governance. The discussions held in board meeting is not restricted to a particular place but governing decisions are taken for benefit of entity as whole. Therefore, no matter where they meet, the meeting still discusses matters pertaining to the company, and therefore, the usual seat of corporate governance should still be taken as the destination state.
13. What is the location of supplier in case of director services?
Section 2(71) of the CGST Act, dealing with location of supplier of services states:
(71) “location of the supplier of services” means,—
(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;
(b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;
(c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provisions of the supply; and
(d) in absence of such places, the location of the usual place of residence of the supplier
However in case of director services, one may like to take a view that the location of supplier is the place where his usual place of residence is situated since such directors does not have any registered office.
However, companies will face enormous difficulties going by the place of residence. IGST needs to be paid in the origin state while the tax would ultimately land up in the hands of destination state Government. This would mean that if the domicile of different directors is in different states, the company has to actually take up registration in that state to pay tax or taking up registration as casual dealer every time such services mandate payment. This seems impractical and absurd.
Since the ultimate benefit of the tax anyways has to come to the state where the seat of corporate governance is situated, it may be ideal for companies to pay tax under CGST/SGST in such state considering that the company is the recipient and also the de jure supplier. It would also be worthwhile to mention in all such transactions to raise the self- invoice in the name of Director c/o the company themselves from the place where their seat of corporate governance is and charge CGST & SGST on the invoice.
14. What is self-invoicing and how will such an invoicing be done?
Section 31(3)(f) of the Act lays down that a registered person shall issue an invoice in respect of goods or services or both received from supplier who is not registered, in case of notified reverse charge supplies and supplies covered u/s Sec 9(4). There is no specific format released by the council for such invoices but the same need to be in compliant with the mandatory contents provided in Rule 46 of the CGST Rules.
Also when payment is made to such person, there is a need to issue payment voucher for documenting the transaction, the format of which is provided in Rule 52 of the CGST Rules.