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 01st
July 2012 but same has been brought under reverse w.e.f. 07th 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)