Apex industry chamber, Confederation of Indian Industry (CII), has urged the Government to keep the remuneration paid to non-executive directors outside the service tax net.

Simply put, the CII has said that non-executive directors should not be required to fork out service tax on the sitting fees and commissions received from companies.

With the negative list system coming into force from July 1, doubts have arisen about the applicability of service tax on remuneration paid to non-executive directors.

The CII has contended that non-executive directors perform management functions and do not provide any service to the company. Therefore, payments made to them should be kept out of the service tax net, the chamber said in a letter to the Finance Ministry.

Till clarification on non-applicability of service tax is issued, its levy may be made applicable under reverse charge mechanism. This will shift the onus of discharging the tax liability to the company making such payment, CII has suggested.

Prior to July 1, remuneration paid to managing director/directors of companies (whether whole-time or independent) did not attract service tax.

The Revenue Department had in July 2009 issued a circular exempting remuneration paid to directors from service tax levy. It had clarified that managing directors/directors being part of the board of directors perform management function and, therefore, are not chargeable to service tax under business auxiliary services as well as management consultancy service.

The CII letter to the Finance Ministry has noted that directors act as trustees of the shareholders while discharging their fiduciary duties.

Listed companies are required to appoint non-executive directors on their boards to ensure good corporate governance. Non-executive directors are appointed to execute statutory duties, the CII letter has said.