Remuneration paid to directors to attract GST – AAR
Companies will have to pay GST under RCM on the remuneration they give to directors, the Authority for Advance Ruling (AAR) has said.
In an application filed before the Rajasthan bench of the AAR, Clay Craft India Pvt Ltd had sought clarification on whether salaries paid to directors would attract Goods and Services Tax.
The company said its directors are working as employees for which they are being compensated by way of a regular salary and other allowances.
“The company is deducting TDS on their salary and PF laws are also applicable to their service. Therefore, in all practical purposes these directors are the employees of the company and are working as such besides being Director of the company,” it said.
In its ruling, the AAR said, “the consideration paid to the directors by the applicant company will attract GST under reverse charge mechanism…”
The AAR, while analysing the case, said that Director is the supplier of services and the applicant of the company is the recipient of the services.
It said that the Central Tax (Rate) notification clearly states that services supplied by a Director of a company will be considered as supply and hence directors cannot be called an employee.
“So it is very clear that the services rendered by the Director to the company for which consideration is paid to them in any head is liable to pay GST under RCM (Reverse Charge Mechanism),” the AAR order said.
The Rajasthan AAR decision may be contested and finally may be overridden by Higher Appellate Authorities.
However this can also create host of litigations for which each company should revisit the documents in support of the claims and where they have not been formally made or documented to have this done at the earliest. But what happens to the past years when one finds in a piquant situation where the Directors Fees were in fact Fees for Directors Services and erroneously were treated as Salary and under the mistaken belief, considered as Exempt and not subjected to GST and also the Reverse Charge. In such a case the assessee may evaluate the way out through the principle of Revenue Neutrality where even the Hon. Supreme Court supports such a principle.
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