FAQ on Service provided by Directors to Company
By: Bimal jain :
The
CBEC has issued Notification No. 45/2012-ST dated 7-8-2012, amending
the Notification No. 30/2012-ST dated 20-6-2012 and expanded the scope
of reverse charge mechanism. With effect from 7-8-2012, services
provided by the director to the company will be covered under the
reverse charge mechanism. We have summarized frequently asked
question(s) in this regard for easy understanding:
Query Is service tax applicable for services provided by all Directors of a Company?
Reply
Service provided by Managing and Whole-time Directors/ Executive
Directors (those who are under employment with the Company) are governed
by the exclusion clause contained in the definition of `service' under
Section 65B (44) (b) which provides that service provided by employees
to their employers in the course of or in relation to employment are
exempt from service tax.
Service provided by Part-time/ Expert/
Independent/ Nominee directors, etc., (those who are not under
employment with Company), are in the nature of providing their
professional/expert services to the company. Hence, the said Services
would be chargeable to Service tax under Reverse charge by the Company
w.e.f 07.08.2012.
Query What will be the service tax liability of the Directors for the period July 1, 2012 to August 7, 2012?
Reply
Notification No. 45/2012 is effective from 07.08.2012 i.e. date of
Reverse charge mechanism will be effective. In other words, Service
provided by Part-time/ Expert/ Independent/ Nominee directors, etc.,
(those who are not under employment with Company) to Company will be
taxable from 1st July 2012 to 6th August 2012 in the hands of said
Director as there was no reverse charge mechanism for stated period.
Query Whether the Directors have to obtain registration and pay service tax for the month of July 2012?
Reply
Yes, it looks like that such Directors providing taxable services to
the company will have to obtain registration and pay service tax for the
month of July, 2012 and for the six days of August, 2012.
It may
be noted that services provided by the directors was not taxable up to
July 1, 2012. However, if the value of other taxable services rendered
by them during Financial Year 2011-12 is less than Rs. 10 lakhs, they
can claim exemption up to Rs. 10 lakhs during 2012-13 if the value of
services provided by them to the companies and other taxable services,
if any, provided by them, is not exceeding Rs. 10 lakhs. This exemption
is as per Notification 33/2012 dated 20.06.2012 and subject to the
conditions prescribed therein.
Query Whether the service tax thus paid by the Company under reverse charge w.e.f 07.08.2012 can be availed as Cenvat credit?
Reply
Eligibility of Cenvat credit of service tax is to be decided with
reference to the definition of input service under the Cenvat Credit
Rules, 2004. Normally, the services provided by Directors should be an
eligible input service for a manufacturer or a service provider and
Cenvat Credit of same would normally be available subject to other
conditions being fulfilled as per Cenvat Credit Rules, 2004.
Query What is the portion of service tax payable by the Company under reverse charge?
Reply
Entire service tax liability will have to be paid by the Company
receiving the services from Directors (those who are not under
employment with Company) w.e.f 07.08.2012.
Query What is point of taxation under reverse charge?
Reply
Rule 7 of Point of Taxation Rules, 2011 states that POT under reverse
charge would be date of Payment provided payment is made within 6 months
from the date of invoice otherwise POT would be Date of Invoice.
Query
What is the document on which Cenvat credit can be taken by the
Company? Whether directors would also be required to issue an invoice?
Reply
In case of service provided by Directors, the tax challan evidencing
payment of service tax by the service recipient would be the relevant
document to avail Cenvat Credit.
It is advisable that the
Directors must raise an invoice within 30 days of completion of the
service as per Service tax Rules, 1994 to have clarity to decide the POT
provisions.
Query Whether Service tax paid by the Company
under reverse charge will impact on remuneration to be paid to the
Non-whole time directors of a Company under the Companies Act?
Reply
As per Section 309 of the Companies Act, the remuneration paid to
Directors cannot exceed the limit of 1% profit of the company when the
company has Managing / Whole Time Directors / Managers or 3% of the
profit of the company if the company does not have a Managing / Whole
Time Directors/ Managers, as the case may be. The Company can pay
remuneration at a rate exceeding 1% or, as the case may be, 3% of its
net profits, with the prior approval of the Central Government.
Now,
non-whole time directors are not exempted from the levy of service tax
and the company to which they are providing their services has been made
liable to pay service tax as a service recipient. The question that
arises is if the company is already paying 1% or 3% to the Directors and
if they additionally pay the Service Tax, will it amount to paying more
than 1% and 3%? taxmanagementindia.com
The Ministry of Corporate
Affairs has clarified vide General Circular No. 24/2012 dated August 9,
2012 that any increase in remuneration of Non-Whole Time Director(s) of
a company solely on account of payment of service tax on commission
payable to them by the company shall not require approval of Central
Government under section 309 and 310 of the Companies Act even if it
exceeds the limit 1% or 3% of the profit of the company, as the case may
be, in the financial year 2012-13.