Simpler tax laws lead to greater compliance. World over the tax laws are drafted keeping in mind this golden rule. The recent amendments in the Service Tax provisions in India have gone one step ahead by shifting the burden to pay tax from the provider of taxable service to the receiver of such service, with a view to dig for more revenue where the mud appears to be soft. The message from the law makers conveyed loud and clear in reversing the burden of tax from the provider of service to receiver of service is “burden of tax on such person from whom it is easier to collect”.
Although Directors are classified as employees of the Company there is no doubt that such Directors are the de facto owners of the Organisation which they head. The Directors milk the organisation by receiving monetary benefits over and above the salary/remuneration by classifying such benefits as commissions, incentives, consultancy charges, sitting fees for attending board meeting etc. The taxability of such benefits have been a contentious issue both in the Income Tax as well as Service Tax provisions.
As per the definition of “Service”, the services provided by an employee to the employer in the course of or in relation to his employment would not attract Service Tax. If the Director is an employee of the Company, the consideration received for providing service in the course of or in relation to such employment would be restricted to only the salaries paid to such Directors, leaving other forms of considerations open to the levy of Service Tax. A Director may also be appointed to represent an entity that has either invested in the Company or is otherwise authorized to nominate a Director. Where a fee is charged by the entity appointing the Director and is paid to such entity, the services is deemed to be supplied by such an entity and not by the individual Director and hence would be taxed in the hands of such entity.
The Government has recently by amending the Notification No. 30/2012-ST dated 20.06.2012 by issue of Notification No. 45/2012-ST dated 07.08.2012 clarified that in respect of services provided or agreed to be provided by a Director of a Company to the said Company, the entire Service Tax liability on such services would be borne by the Company. This amendment has laid to rest a few issues concerning taxability of considerations paid to the Director, such as:-
1. Only services provided by a Director to the Company are taxable. The Director of the Company discharging his function as an employee and earning salary or remuneration for such function would not be attracting Service Tax, since such discharge of function is in course of employment .
2. In case of any other payments received by the Directors for discharge of functions other than that of an employee, Service Tax liability would arise and the tax would be paid by the Company under reverse charge mechanism.
3. In case of nominated Directors, if payment is made to the entity nominating such Directors for the services rendered by the Directors, the Service Tax liability would rest on such entity and the reverse charge mechanism would not apply, since in such cases the services are rendered by the entity to the Company and not by the Directors.
While issuing the amendment the Government seems to have conveniently forgotten its Circular No. 115/9/2009-ST dated 31.07.2009 on the issue of Commission/remuneration paid to Directors (whole-time or independent) and Managing Director. It was clarified in the circular that commission amount paid by a company to their Managing Director/Directors (Whole-time or Independent) even if termed as commission, is not the ‘commission’ that is within the scope of business auxiliary service and hence service tax would not be leviable on such amount. It was further clarified that the payments made by Companies, to Directors cannot be termed as payments for providing management consultancy service and therefore the amount paid to Directors (Whole-time or Independent) is not chargeable to service tax under the category ‘Management Consultancy service’. However, in case such directors provide any advice or consultancy to the company, for which they are being compensated separately, such service would become chargeable to service tax.
Whether the above Circular have lost its significance in view of the changing pattern of Service Tax provisions or still retains its relevance is again a contentious issue. With the Government maintaining a studied silence on the applicability of such Circulars issued under the old law, the enforcers of such half baked law are having a field day at the cost of the tax payers. Failure to address the grey areas in the new law is sure to lead to a chaotic situation with discretionary powers finding its way into the hands of the biased enforcers of the law, resulting more people knocking the doors of Courts for justice.