Harmonized statutory treatment of executive vs non-executive director remuneration under Income Tax TDS rules, Schedule III exclusions, and GST Reverse Charge Mechanism.
In This Article
3 SectionsDirector Remuneration Taxability: Section 192 Salary vs Section 194J Professional Fee & GST RCM
Compensating company directors in India involves navigating three intersecting regulatory regimes: Company Law (Sections 197 & 198), Income Tax Withholding (Sections 192 & 194J), and Goods and Services Tax (Reverse Charge Mechanism).
Misclassifying payments made to Managing, Whole-Time, or Independent Directors leads to automatic penalty notices from both Income Tax TRACES and GST departmental audit wings.
1. Executive vs Non-Executive Directors: The Core Classification
| Parameter | Executive / Whole-Time Director / MD | Non-Executive / Independent Director |
|---|---|---|
| Relationship with Company | Employer-Employee contract exists in addition to directorship | Independent professional / Board advisory role |
| Income Tax TDS Section | Section 192 (Average slab rate withholding) | Section 194J (10% TDS on professional fee / 2% technical fee) |
| Form 16 vs Form 16A | Part A & Part B of Form 16 issued annually | Form 16A issued quarterly via TRACES |
| GST Applicability | Exempt / Outside GST (Schedule III Entry 1) | Taxable under RCM at 18% (Paid by company) |
2. When does GST Reverse Charge (RCM) Apply?
Following CBIC Circular No. 140/10/2020-GST:
- Salaried Directors: Where remuneration is paid to an executive director and subjected to TDS under Section 192, recorded in company books as 'Salaries', and covered by an employment contract, it is treated as a supply of service by an employee to the employer under Schedule III of the CGST Act. No GST is payable under forward or reverse charge.
- Sitting Fees & Commission to Independent Directors: Any commission, sitting fee, or consultancy payment made to non-executive or independent directors subjected to TDS under Section 194J is statutorily liable to 18% GST under Reverse Charge Mechanism (RCM).
- The company must pay 18% GST in cash in its monthly GSTR-3B and can claim 100% input tax credit in the same return.
3. Companies Act Remuneration Limits (Section 197)
For public limited companies and subsidiaries of public companies:
- Total managerial remuneration cannot exceed 11% of net profits calculated under Section 198 without approval of the company in general meeting.
- For private limited companies, Section 197 limits do not apply, but remuneration must be authorized by the Articles of Association (AoA) and approved via Board / Shareholder resolutions.
For secretarial audit, board resolution drafting, and executive tax structuring in Raipur, connect with our Corporate Secretarial team.
Authored by CA Rabi Agrawal & Practice Team
Rabi Agrawal & Associates, Chartered Accountants — Head Office Raipur (CG), Branch Office Jayapatna (Odisha).