Service Tax on services provided by directors to the Company

Reverse charge mechanism was introduced purposefully to cover unorganized sectors like GTA or cover small service providers because for them paying tax may not be a problem but understanding of legal provisions and then complying with those provisions could really have become difficult but now reverse charge has become fashion and government applying to any sector even those sector can understand the law and can manage as well. Reverse charge on legal service/ service by directors to the company are the best example where Government collecting tax on reverse charge basis while it should have been directly collected through these service providers themselves.

But this is not my topic today and  I am just here to try to understand and share understanding on the “service provided by Director to the Company”. In following para whatever is written is the compilation of the information which I read and understood thus very beginning I would request that it is sharing and no conclusion be drawn just based on my discussion.

1.                Date of applicability of service tax on Directors

Service tax is payable on service provided by directors to the company is w.e.f 01^st July 2012 but same has been brought under reverse w.e.f. 07^th Aug 2012 thus for the period 1-7-2012 to 06-08-2012 , director would be liable personally to collect & pay service tax.

2.       Whether all type of directors are liable for service tax

No. Only non executive directors, independent directors and nominee directors are liable and Managing director(MD) and whole time director or directors in full time employment of the company not liable for service tax.

3.       Why are M.D., whole time director or directors in full time employment of the company not liable for service tax?

M.D. & whole time director are treated as an employee of the company and services provided by the employee to employer in the course of employment has been excluded from the definition of the service under section 65B(44) thus they fall outside scope of service.

4.       What types of payment to directors are covered?

As all services provided by director to the company are taxable thus any payment made to director for his capacity as director would be covered under service tax. Sitting fee, commission, bonus, share in profit ESOP are some examples. Nomenclature of payment would not affect taxability, only condition is it should be for services in his capacity of director.

5.        Whether reimbursement of expenses incurred by directors be liable for service tax?

Ideally it should not be but valuation rules must refer for taxability of reimbursement of the expenditures.

6.        As service tax on this service is payable under reverse charges whether service tax should be paid on gross value of services or amount paid to directors should be taken as inclusive of service tax?

In the normal course, service tax is payable on the amount payable/paid to service provider and service tax should not calculated by making reverse computation of liability because service provider (i.e director) would have charged tax on the entire amount if he had been liable to pay tax.

7.       Remuneration/fee paid to the director is less than Rs 10 lakhs per annum (i.e threshold limit for small scale service provider) . Is the company liable to pay service tax under reverse charge?

Proviso (ii) to Para 1 of the Notification No. 33/2012-ST dated 20-6-2012 which provides for exemption to small service providers having value of taxable service less than specified limit states that nothing in this notification shall apply to such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules,1994. Thus threshold exemption of ` ten lakhs is not applicable in cases where the service receiver is liable to pay service tax under reverse charge method, as per provisions of section 68(2) read with rule 2(d) of Service Tax Rules.

8.       Is director required to issue an invoice to the company?

Ideally it should issued because Rule 4A of service tax rules provides that every person providing taxable service shall issue an invoice within 30 days from the date of completion of service or date of payment received whichever is earlier  and giving details as prescribed. But Rule 3(1) of Service Tax Rules states that every person liable to paying service tax shall apply for registration within 30 days. Provisions pertaining to service tax start after applying on registration. Thus, remaining rules apply only to a person who is registered under service tax. In other words, rule 4A applies only to person registered under service tax.

Further, as per section 73A(2) of Finance Act, 1994, where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government.

Thus, if any amount is collected representing as service tax, it will be required to be deposited with Government. Considering this provision, it can be said if director issues invoice indicating service tax, but does not pay it to Government, it will be in violation of section 73A(2) of Finance Act, 1994.

Indeed the director cannot issue invoice under rule 4A as that rule requires that service tax payable should be shown in the invoice, which cannot be done in view of provisions of section 73A(2) of Finance Act, 1994.  (Ref: FAQ by Datey sir)

9.        The company has sufficient Cenvat credit available. Can the service tax payable on director’s remuneration be paid through Cenvat credit?

Cenvat Credit cannot be utilised for payment of service tax in respect of services where the person liable to pay tax is the service recipient [Explanation to rule 3(4) of Cenvat Credit Rules, inserted w.e.f. 1-7-2012]. [even earlier, it was not allowable]

Thus, the service tax is payable by cash only. (Ref: FAQ by Datey sir)

Can company take Cenvat credit of service tax paid under reverse charge?

It is well settled that Board of Directors are entrusted with task of overall administration of a company.

The Definition of Input Service as contained in rule 2(l) of Cenvat Credit Rules includes services used in relation to modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, procurement of inputs, accounting, auditing, financing, recruitment and quality control etc.

All these services are certainly related to administration of a company. Hence, in my view, the company will be eligible to avail Cenvat credit of service tax paid on remuneration paid to directors.

It is well settled that the term ‘includes’ expands the scope of the definition. It is also settled ‘in relation to’ is a broad term. It is expansive and not restrictive [The term ‘means’ is restrictive]. (Ref: FAQ by Datey sir)

What would be the eligible document for availing Cenvat credit?

The assessee paying service tax under reverse charge method will be eligible to avail Cenvat credit of the service tax paid, on the basis of GAR-7 challan (earlier TR-6 challan) by which the tax is paid [Rule 9(1)(e) of Cenvat Credit Rules, as amended w.e.f. 1-5-2006]. The assessee should pay service tax in cash i.e. without utilising Cenvat credit. (Ref: FAQ by Datey sir)