Section 65B(44) of Finance Act, 1994 as Amended by Finance Act 2012 defines Service as follows :
This definition further goes on to exclude in clause (b)"service" means any activity carried out by a person for another for consideration, and includes a declared service.
(b) a provision of service by an employee to the employer in the course of or in relation to his employment
This definition under 65B(44) and above exclusion makes it amply clear that :
Services of a Director who is not an Employee of the Company (ie) Non Executive Directors are covered under the scope of Service tax. Accordingly any remuneration to Non Executive Directors both monetary and non monetary are subject to Service Tax from 1.7.2012.
Valuation of Service
All monetary benefits like Fees, Commission, bonus etc to be taken at the monetary value. Non monetary benefits like Car, Phone, accommodation etc to be valued as per valuation Rules and subject to Service Tax
Foreign Directors (Only Non Executive)
Irrespective of Directors are within India or abroad Service tax is applicable on their monetary and non-monetary considerations for services rendered as Director
Who Pays Service Tax
From 1.7.2012 to 6.8.2012 for Non Executive Directors within India, liability is on the Directors to pay Service tax. Hence they need to have registration under Service Tax and discharge their liability. On their option they can choose to take the Rs.10 lakh exemption limit for discharge of their liability
From 1.7.2012 for Directors outside India (Foreign Directors), the company has to pay Service tax on Reverse Charge Mechanism as a Representative Assessee. Here there is no provision for Rs.10 lakh exemption. For the full amount (irrespective of the quantum) service tax needs to be paid.
On 7.8 2012 Notification No.45/2012 was introduced under which even for local Non Executive Directors service tax liability has to be discharged by the Company. In this situation, the company has to get itself registered under Service Tax and discharge the Service tax liability.
In short, the situation as on today is that for all Non Executive Directors the company has to discharge service tax liability under Reverse Charge Mechanism as per Notification No.45/2012.
Implications under Company Law
Due to the above changes in Service Tax and the Service Tax amount being 12.36% of the monetary and non monetary benefit of the Non Executive Directors the expenses on Directors to the company has increased to that extent, this in turn affects section 198, 309 & 310 of the Companies Act, 1956. This would mean that some companies have to approch Central Government again if they breach the threshold limits specified in these sections. To avoid this complication for the financial year 2012-13 the Ministry of Corporate Affairs have issued a Notification No.24/2012 dated 9.8.2012 wherein it exempts companies from applying to Central Government for approval for increase in remuneration of Directors only on account of Service Tax. Note, this provision is only for the year 2012-13 and from next year onwards the companies have to apply for approval inclusive of service tax.