The indirect tax board has sought to put to rest the controversy over the imposition of the goods and services tax (GST) on the income of directors of companies.

The Central Board of Indirect Taxes and Customs (CBIC) has clarified that remuneration of directors, by whatever name they are referred to (executive director, whole time director, independent director etc), would attract GST if they are not employees of the companies concerned. The GST will be imposed on them by reverse charge mechanism (RCM).

Normally, a person or entity providing services pays the tax to the exchequer, and recovers it from the receiver of the service.

But under RCM, the receiver of the service pays the tax by deducting it from the service provider's compensation.

In case directors are employees of the companies, part of their remuneration would draw GST, while the other part will not attract it.

The CBIC said that the part of directors' income which is declared as salary in the books of companies concerned and tax is deducted at source (TDS) on it under Section 192 of the I-T Act would not draw GST.

However, that part which is declared as "other than salaries" and TDS is imposed on it under Section 194 (j) would draw GST.

These remunerations would be treated as fees for professional or technical services.

The clarification comes amid contradictory rulings of authorities for advance rulings (AARs).

"We were seeing contradictory AAR rulings on this matter and there was confusion in the minds of the taxpayers on how to treat director remuneration. Linking it with the treatment under the I-T Act would result in consistency across both the laws providing more certainty to tax payers," said Amit Maheshwari, managing partner at Ashok Maheshwary & Associates.

Abhishek Jain, partner, EY, said this clarification was sought for most businesses, especially on account of the contrary advance rulings and potential impact on businesses. "With the clarification, linking income tax and GST, businesses would need to now evaluate comprehensively treatment of renumeration of directors under income tax, GST and accounting," he said.

Earlier, Karantaka AAR had ruled that while the remuneration of executive directors would not attract GST as they were employees of the company, the remuneration of non-executive directors would attract GST through RCM.

The order stirred a controversy as other state AARs have held that all directors are liable to pay GST.

In the case related to Clay Craft, the Rajasthan AAR had ruled that the services rendered by the director to the company for which consideration is paid to them in any head are liable to attract GST under RCM and the situation would remain the same even when the director was also a part time director in another company. The AAR did not distinguish between executive director and non-executive director as was done by its Karnataka counterpart.

In a case relating to ALCON Consulting Engineerrs (India), the Karnataka AAR in 2017 ruled that the consideration paid to the director in the form of remuneration was in relation to services provided by the director to the company. Thus, the company was required to pay GST under RCM on the remuneration paid to the director.