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Director’s salary exempt from GST: Karnataka AAR ruling

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New Delhi: The salary of a director in a company is not liable to be taxed under Goods and Services Tax (GST), the Karnataka Authority of Advanced Rulings (AAR) has said. The ruling is set to stir up the controversial issue of taxing incomes of directors or partners in a firm, since the Rajasthan bench of AAR had ruled last month that the incomes were liable to be taxed. “The incomes received towards salary/remuneration as a non-executive director of a private limited company, renting of commercial property, residential property and the values of amounts extended as deposits/loans/advances out of which interest is being received are due to be included in the aggregate turnover for registration,” the Karnataka AAR said in its ruling dated May 4.

ET has seen a copy of the order, which also notes that salary of a working partner in a partnership firm was “neither a supply of goods nor supply of service… the income is not under the purview of GST as share of profit is nothing but application of money”. This comes within a month of the Rajasthan bench ruling in the case of Clay Craft India Pvt Ltd that remuneration paid to directors will attract GST under the reverse charge mechanism” and that a director was a supplier of service and not an employee.

Experts said while the Karnataka AAR’s order will provide relief to directors in a company, contrary rulings by state-level AARs will lead to increased confusion for taxpayers. “Different state authorities are pronouncing diametrically opposite rulings is only adding to the uncertainty of the taxpayers, which is the last thing one would hope for in the current scenario,” said Harpreet Singh, partner-indirect tax at KPMG India. “Taxpayers operating multiple locational offices especially in the states of Karnataka and Rajasthan would be under a dilemma as to which ruling would be made applicable to them,” said Rajat Mohan, senior partner at AMRG Associates.

Some said the contrary rulings, and several others in the past issued by AARs of other states on levying GST on salary of directors— and even Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on levying service tax prior to GST regime—were reflective of the absence of a centralised AAR system. “Such contrary rulings create confusion amongst the industry players and give more credence to the need of creation of a national appellate authority for advance ruling,” said Rajat Bose, partner at Shardul Amarchand Mangaldas & Co.

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