Service Tax on Fee to Directors - Problems With Companies Act
AS per Section 309 of the Companies Act, the remuneration paid to Directors cannot exceed t he limit of 1% profit ofthe company when the company has a 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 one percent or, as the case may be, three per cent of its net profits, with the approval of the Central Government.
Now, if the company is already paying 1 percent or 3 percent to the Directors and if they additionally pay the Service Tax, will it amount to paying more than 1 percent and 3 percent?
The Ministry of Corporate Affairs has clarified:
First of all, the Ministry admits that the Non-Whole Time Directors of the Company are presently not covered under the exempted list and as such, the sitting fee/ commission payable to them by the company is liable to Service Tax.
The Ministry further clarifies that if the Service Tax is paid by the Company, it will be deemed to be a part of the remuneration and would increase the amount of remuneration.
So, Government has decided 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.
What happens after that?
Nothing really. The Revenue Department had already solved this problem. By Notification No. dated 07.08.2012, Government had amended the Service Tax Rules to stipulate that in respect of services provided by a Director to the Company, the Company is liable to pay the tax ( 09.08.2012). So, it is now mandatory for the Company to pay the tax and it has no option. A mandatory payment made by the company cannot be added to the remuneration of the director to determine the 1 percent or 3 percent limit.
MCA General Circular No. : Dated August 09 2012