GST on Director Remuneration: Circular 140 and Reverse Charge Explained
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Quick Answer: Is GST Applicable on Director Remuneration?
GST on director remuneration depends on the nature of the payment and the director's relationship with the company. Salary paid to an executive, whole-time or managing director acting as an employee is generally outside GST. However, remuneration paid to independent or non-employee directors for their services is generally taxable at 18% under the reverse charge mechanism (RCM), with the company responsible for paying the tax.
CBIC Circular No. 140/10/2020-GST, dated 10 June 2020, clarifies how businesses should distinguish between salary and taxable director remuneration.
Why Is GST on Director Remuneration Confusing for Businesses?
A company director may perform different roles within the same organisation. A managing director, for example, may receive a regular salary for employment-related responsibilities while also receiving separate payments for professional or technical services.
GST treatment depends on the nature of these payments, not simply on whether the recipient holds the title of director.
Under Schedule III of the Central Goods and Services Tax (CGST) Act, 2017, services provided by an employee to an employer in the course of or in relation to employment are not treated as a supply of goods or services.
On the other hand, Notification No. 13/2017-Central Tax (Rate) places services supplied by a director to a company under the reverse charge mechanism, subject to the applicable conditions.
Under RCM, the company receiving the service pays the applicable GST instead of the director charging and collecting it.
The main question, therefore, is whether the remuneration represents salary under an employer-employee relationship or consideration for services supplied in the capacity of a director.
What Does CBIC Circular 140/10/2020-GST Say?
The Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 140/10/2020-GST on 10 June 2020 to clarify the GST treatment of remuneration paid to company directors.
The circular addresses two broad categories.
1. Independent Directors and Non-Employee Directors
Independent directors, as defined under Section 149(6) of the Companies Act, 2013, are not employees of the company merely by virtue of their directorship.
Accordingly, remuneration paid to independent directors and other directors who are not employees for services supplied in their capacity as directors is generally taxable under RCM.
Examples may include:
Sitting fees for attending board meetings.
Fees for attending committee meetings.
Other remuneration for services performed in the capacity of a director.
The company is responsible for paying GST at the applicable rate, generally 18% for these services.
2. Whole-Time Directors and Managing Directors Who Are Employees
The treatment differs when a whole-time director or managing director has an employer-employee relationship with the company.
Under the circular, remuneration that represents salary for employment-related services is outside GST. The circular refers to the treatment of the payment under the relevant income-tax provisions as an indicator when distinguishing salary from other remuneration.
However, a director may receive separate payments for professional, technical or other services outside the employment relationship. Such payments must be examined separately and may attract GST under RCM.
Important: A director's designation alone does not determine GST liability. Businesses should review employment agreements, board resolutions, remuneration structures, accounting entries and the actual nature of the services.
Read the official CBIC Circular 140/10/2020-GST for the detailed clarification.
When Does 18% GST Apply to Director Remuneration?
The following table provides a practical overview of the usual GST treatment.
Type of payment | General GST treatment |
Salary to an employee-director | Outside GST when paid under an employer-employee relationship |
Sitting fees paid to an independent director | Generally taxable under RCM at 18% |
Remuneration to a non-employee director for directorial services | Generally taxable under RCM at 18% |
Separate professional or technical fees paid to a director | Requires classification based on the actual nature of the service; may attract RCM |
Commission or brokerage paid to a director | Requires separate review of the nature of the payment and the applicable GST provisions |
The treatment of commission, reimbursements and payments for services outside a director's normal role can depend on the specific facts. Businesses should not automatically classify every payment as either salary or taxable director remuneration without reviewing the arrangement.
How Can a Company Pay GST on Director Fees Under RCM?
Companies should establish a clear process for identifying, calculating and reporting GST on taxable director remuneration.
Step 1: Identify Taxable Payments
Review the general ledger, payroll records, board resolutions and director remuneration agreements.
Separate employee salary from taxable payments made to non-employee directors. Sitting fees and committee fees should be reviewed for RCM applicability.
Reimbursements should also be examined to determine whether they form part of the consideration for the service or qualify for separate treatment.
Step 2: Prepare the Required Documents
Where applicable, the company must issue a self-invoice for taxable services received from an unregistered supplier, in accordance with Section 31(3)(f) of the CGST Act and the applicable rules.
A payment voucher must also be issued when required under Section 31(3)(g).
Maintain supporting records, including the remuneration agreement, payment details, self-invoice and RCM calculation.
Step 3: Calculate GST at the Applicable Rate
For director services taxable at 18%, calculate GST on the applicable taxable value.
For example, if taxable director remuneration is ₹5,00,000, the GST calculation is:
Taxable value: ₹5,00,000
GST at 18%: ₹90,000
Total amount for GST calculation: ₹5,90,000
For an intra-state supply, the tax is generally divided into 9% CGST and 9% SGST. For an inter-state supply, 18% IGST generally applies, subject to the applicable place-of-supply rules.
Step 4: Pay RCM Tax Through the Cash Ledger
RCM liability must be discharged through the electronic cash ledger. Existing input tax credit cannot be used directly to pay the reverse charge liability.
This distinction is important because eligible ITC can generally be claimed after the RCM tax has been paid and the other credit conditions have been met.
Step 5: Report the Liability in GSTR-3B
Report the applicable inward supplies liable to reverse charge in Table 3.1(d) of GSTR-3B, following the current return instructions and applicable reporting requirements.
The company should reconcile the reported amount with its accounting records and relevant inward-supply details.
Step 6: Claim Eligible Input Tax Credit
After paying the RCM tax, the company may claim eligible ITC in Table 4(A)(3) of GSTR-3B, subject to the CGST Act, including the conditions under Sections 16 and 17.
ITC is not automatic. The company must establish that the expense is eligible for credit and is not blocked or restricted under the applicable provisions.
For the latest reporting instructions, refer to the official GST Portal GSTR-3B guidance.
What Is the Time of Supply for Director Services Under RCM?
The time of supply determines when GST liability arises.
For services taxable under RCM, the general rule under Section 13(3) of the CGST Act refers to the earlier of:
The date of payment recorded in the recipient's books or the date the payment is debited from the bank account, whichever is earlier; or
The date immediately following 60 days from the date of issue of the invoice by the supplier.
Where the general rule cannot be applied, the relevant statutory provisions provide a fallback.
Companies should track the payment date, invoice date and applicable tax period to avoid delayed reporting. Interest may apply where GST is paid late, depending on the circumstances and the applicable law.
Practical Examples of GST on Director Remuneration
Example 1: Sitting Fees Paid to an Independent Director
Alpha Components Pvt. Ltd. pays ₹6,00,000 in sitting fees to its independent directors during a quarter.
Assuming the entire amount is taxable at 18% under RCM:
Particulars | Amount |
Sitting fees | ₹6,00,000 |
GST at 18% | ₹1,08,000 |
Total including GST for accounting purposes | ₹7,08,000 |
The company must pay ₹1,08,000 in GST through its electronic cash ledger and report the liability in the appropriate return.
If the company is eligible for full ITC and satisfies all statutory conditions, it may claim ₹1,08,000 as input tax credit. The tax payment and credit claim must be recorded correctly, even when the eventual net GST cost is nil.
Example 2: Managing Director Receiving Salary and Consultancy Fees
Suppose a managing director receives:
Annual salary: ₹60,00,000.
Separate consultancy fee for a technical project: ₹10,00,000.
If the ₹60,00,000 is genuine salary paid under an employer-employee relationship, it is outside GST.
The separate ₹10,00,000 consultancy fee requires independent classification. If it represents a taxable service supplied by the director to the company and falls under the applicable RCM entry, GST at 18% would amount to ₹1,80,000.
The company should not automatically treat the consultancy fee as salary simply because the recipient is also its managing director.
What Should Businesses Know About GST Compliance in 2026?
The fundamental distinction explained in Circular 140/10/2020-GST remains relevant: employee salary is generally outside GST, while taxable services supplied by non-employee directors may attract RCM.
Businesses should also review their tax and accounting processes in light of changes effective from 1 April 2026 under the Income-tax Act, 2025.
For payments governed by the new Act, salary TDS is covered by Section 392, while other specified payments are addressed under Section 393 and its relevant table entries. The applicable provisions depend on the transaction and the relevant date.
Although the income-tax section references have changed, this does not independently change the GST treatment of director remuneration. Companies should continue to assess the actual employment relationship and nature of each payment.
Businesses should also review any outstanding GST liabilities, incorrect RCM entries and potentially ineligible ITC claims. Where corrections are needed, the appropriate corrective procedure should be determined based on the return period, payment history and applicable legal provisions.
Common Mistakes to Avoid
Companies can reduce GST compliance risks by avoiding these common errors:
Treating every payment to a managing director as salary without checking the underlying arrangement.
Missing RCM on sitting fees because the director has not issued a tax invoice.
Paying RCM liability through the electronic credit ledger instead of the cash ledger.
Claiming ITC without first paying the RCM tax.
Failing to issue required self-invoices and payment vouchers.
Reporting RCM incorrectly in GSTR-3B.
Claiming ITC without checking the applicable eligibility and blocked-credit provisions.
Ignoring the time-of-supply rules and applicable interest on delayed payment.
Misclassifying GST on Director Remuneration due to incorrect accounting entries or incomplete documentation.
A periodic review of director remuneration and GST returns can help identify these issues before they lead to further compliance problems.
Frequently Asked Questions
Q1. Is GST applicable on a managing director's salary?
No, salary paid to a managing director under a genuine employer-employee relationship is generally outside GST. Separate fees for professional or other taxable services must be assessed independently.
Q2. Who pays GST on independent director fees?
The company receiving taxable services from an independent director generally pays GST under the reverse charge mechanism. The applicable rate is generally 18%.
Q3. Can a company claim ITC on GST paid under RCM for director fees?
Yes, eligible businesses may claim ITC after paying the RCM tax, provided the expense meets the applicable conditions under Sections 16 and 17 of the CGST Act. Blocked or otherwise ineligible credits cannot be claimed.
Q4. What happens if a company has not paid GST on director fees in earlier periods?
The company should review the relevant transactions, calculate any outstanding liability and determine the appropriate corrective procedure. Interest or other consequences may apply, so professional advice is recommended before making a voluntary payment or responding to a notice.
Q5. Is GST applicable to sitting fees paid to directors?
Sitting fees paid to independent or other non-employee directors for services in their capacity as directors are generally taxable under RCM at 18%. The company should verify the nature of the payment and the applicable provisions.
Q6. What Is GST on Director Remuneration?
GST on Director Remuneration depends on whether the payment is salary under an employer-employee relationship or consideration for taxable services. Salary is generally outside GST, while eligible non-employee director fees are generally subject to 18% GST under RCM.
Review Your Director Remuneration Before Your Next GST Return
Understanding GST on Director Remuneration helps companies distinguish between employee salary and taxable director fees, calculate reverse charge liabilities correctly, and claim eligible input tax credit.
Finaccle Advisory helps businesses strengthen GST compliance, review accounting records and identify director-related RCM reporting issues.
Before filing your next GSTR-3B, review your director remuneration entries and confirm which payments may require reverse charge treatment.
Ready to review your GST position?
Visit Finaccle Advisory to explore our services and discuss your business compliance requirements.
