Corporate honchos and Directors on the boards of companies have got a booster dose from the Government.

The Finance Ministry has said that remuneration paid to Managing Directors and Directors of companies for their performance as Managing Director/Director would not be liable to service tax.

This Central Board of Excise and Customs (CBEC) stance was applicable irrespective of whether the director compensated was a whole-time or an independent one.

Hitherto, most companies had treated their commission payouts in substance as salary, though they were commission for company law purposes.

This move could lead to some savings for companies as many would have had to fork out service tax if the CBEC had clarified that the tax would be applicable on such payouts. The clarification that this would not attract service tax could well be considered as another stimulus for the top management in Corporate India.

It is common practice for Indian companies, especially listed ones, to pay commission to their Directors (Managing Director and Independent Directors). The commission was linked to the bottomline performance of the company. This practice often got the best out of the top management.

Doubts were raised before the CBEC on the applicability of service tax under business auxiliary services on commission paid to Managing Director/Directors (whole-time or independent).

Some companies make payments to Managing Director/Directors (whole-time or independent), terming the same as commissions. The said amount paid by a company to their Managing Director/Directors (whole-time or independent), even if termed as commission, is not the commission that is within the scope of business auxiliary services. Hence service tax would not be leviable on such amount, the CBEC said in a circular.

On consultancy

On the issue of applicability of service tax on independent directors under management consultancy service, the CBEC has said that the Managing Director/Directors performs management function and they do not perform consultancy or advisory function.

The definition of management consultant service makes it clear that what is envisaged from a consultant is advisory service and not the actual performance of the management function. The payments made by companies to directors cannot be termed as payments for providing management consultancy service, the circular said.

The CBEC has, therefore, clarified that the amount paid to Directors (whole-time or independent) is not chargeable to service tax under the category management consultancy services. However, in case Directors provide any advice or consultancy to the company, for which they are being compensated separately, such services would be chargeable to service tax.