Is a Managing Director Liable to Pay GST under Reverse Charge Mechanism (RCM)?

Understanding the liability of a managing director in relation to Goods and Services Tax (GST) is crucial for businesses operating under the Reverse Charge Mechanism (RCM). In this article, we'll explore the legal framework and specific scenarios where a managing director's services fall under RCM and who is ultimately responsible for paying GST.

Role and Employment of a Managing Director

A managing director is typically employed by a company and is responsible for overseeing its operations, strategy, and overall management. According to the Contract of Employment, the managing director's services fall outside the purview of GST under item 1 of Schedule III to the Central Goods and Services Tax (CGST) Act. This means that the services provided by the managing director to the company as an employee are not generally subject to GST.

Services Provided by Managing Directors

However, there are specific services provided by managing directors that are subject to GST under the Reverse Charge Mechanism (RCM). This applies to any services rendered by the managing director to the company, other than those provided in the course of employment. Common examples include:

Sitting fees Commission Consulting payments

These services would be classified as 'services provided by a director of a company' and therefore fall under RCM.

Reverse Charge Mechanism (RCM) and GST Liability

The Reverse Charge Mechanism (RCM) is a provision under the GST legislation that ensures the supplier does not pay GST but places the liability on the recipient of the supply. In the context of a managing director providing services to a company, the company becomes the liable party for paying GST.

Vide Entry No. 6 of Notification 13/2017 of Central Tax Rate dated 28th June 2017 and Entry No. 7 of Notification No. 10/2017 Integrated Tax Rate date 28th June 2017, the Government notified that the supply of services by a Director of a Company is subject to the Reverse Charge Mechanism. This means that the company, as the recipient of these services, is responsible for withholding, accounting for, and paying the GST.

Exemptions and Provisions

It's important to note that the CGST Act excludes services provided by an employee to an employer in the course of employment from the levy of GST. Therefore, a managing director's services rendered as an employee of the company are not subject to GST.

The specific elements of a managing director's work that are excluded from GST under this provision include:

Salary and wages Regular management duties Bonus and benefits

However, any additional services such as sitting fees, commissions, or consulting payments that are not an inherent part of the managing director's employment contract are subject to RCM and GST.

Conclusion

In summary, a managing director is generally not liable to pay GST for services rendered as an employee. However, any services provided by the managing director to the company that are not part of his employment terms are subject to RCM, and the company bears the responsibility for paying GST.

Understanding the specific conditions and liabilities under RCM is essential for both managing directors and the companies they serve to ensure compliance with the GST regulations.

For more information on GST and RCM, consult the official GST portal or seek advice from a professional accountant or legal advisor.