Director remuneration a burning issue under income tax and service tax

There is a conflict about whether director remuneration whether it is salary income or is it falling under the head of Business or Profession. In the union budget, we have got a new clause u/s 194J that is 194 (J)(1)(ba) that defines any remuneration or commission paid to the director of the company are liable to tax deduction at source @ 10%. This article will give light to both income tax issues and service tax reverse charge mechanism issues and try to resolve Director remuneration a burning issue under income tax and service taxDirector remuneration a burning issue under income tax and service tax INCOME TAX ISSUES Whether section 192 or 194J ? This decision of finance ministry was the result of many uncertainties over the TDS on sitting fees, commission and remuneration paid to the directors. Sitting fees is the fees which are given to the directors for attending the meeting of board or any committee as the case may be. But now with the introduction of the above new clause (1)(ba) in section 194J, it is clear that TDS on any remuneration other than covered under salary or fees paid to directors or sitting fees or any payment of same nature by other name shall be covered under the ambit of sec. 194J and will be subjected to TDS @10%. Well the answer to the above question totally depends on director relationship with the company. If there is employer employee relationship TDS under 192 otherwise 194J applicable vide newly inserted clause (1) (ba). The said section is applicable from 01.07.2012. Moreover there is no threshold limits for deducting TDS for the said expense under the Act. TDS u/s 192 is applicable on remuneration payable in case of Managing Director or whole time director or executive director, if the director is in full time employment of the company. ANALYSIS We bifurcate the blog  into two parts where the payments are made to directors in two ways: a.       By way of salary. b.      By way of fees paid for the professional services. a)      By way salary: When the payment is made on account of salary, then provisions of sec.192 are attracted. It clearly means that under such situations directors are considered as employee of the company. Generally the executive directors are paid salary and they are not entitled to sitting fees or for other services. b)     By way of fees paid for the professional services: It may be noticed that directors’ remuneration includes payments made to Directors for services rendered in any other capacity as per the Companies Act, 1956. ·         Commission, ·         sitting fees ·         any other fees paid for rendering professional services. SERVICE TAX ISSUES Whether the service tax is payable when directors are paid on account of rendering services? If Companies make payments to Managing Director/Directors whether Whole-time or Independent, referring those payments as ‘Commissions’, then such payment remitted by companies to their Managing directors or directors even though termed as commission, is not the ‘commission’ that is within the ambit of business auxiliary service. Therefore there is no question of chargeability of service tax on such amount. The board further clarified that Managing Director or Directors being perform managerial functions and they do not any perform consultancy or advisory function. The definition of management consultant service makes it clear that what is envisaged from a consultant and where the expertise of consultant is asked for is termed as advisory service and not the actual performance of the management function. The payments made by Companies, to Directors cannot be termed as payments for providing management consultancy service. Therefore, it is reiterated that service-tax is not chargeable under the category ‘Management Consultancy service’ on the amount paid to Directors whether Whole-time or Independent is not chargeable to service tax under. However, service –tax is chargeable if such directors provide any advice or consultancy to the company and they separately paid for such services. Whether the commission payable to director will be covered under section 194J OR 194H?  With insertion of new clause in Finance bill 2012 in sec.194J namely clause (1)(ba), it is very clear that commission or any other sum paid by any name to the director which is not covered under section 192 will fall within the ambit of sec. 194J.  CONCLUSION So if you have shown director remuneration in company’s profit and loss statement as a professional charge then be prepared for deduction of TDS u/s 194J and you will also become liable for service tax reverse charge mechanism @ 12.36% . Thanks for reading for this article. Please feel free to write to us, We want to hear it all!Suggestions? Complaints? Feedback? Requests?  at [info@taxmantra.com] or call us at +91 88208208 11. We would be more than happy to assist you.