Maximum Limit for Payment of Sitting Fees to Directors and Applicability of Service Tax Under Reverse Mechanism

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Maximum Limit for Payment of Sitting Fees to Directors and Applicability of Service Tax Under Reverse Mechanism

Maximum Limit for Payment of Sitting Fees to Directors


Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that a company may pay a sitting fee to a director for attending meetings of the Board or committees thereof, such sum as may be decided by the Board of directors thereof which shall not exceed Rs.1 lakh per meeting of the Board or committee thereof. For Independent Directors and Women Directors, the sitting fee shall not be less than the sitting fee payable to other directors.

Whether Sitting Fees can be paid to Managing Director or Whole-time/Executive Director ?

The Companies Act, 2013 does not have any provisions restricting payment of sitting fees to Managing Director(MD) or Whole-time/Executive Director. Therefore, they can be paid sitting fees  for attending meeting of Board of Directors of a company.

Though generally the Managing / Whole-time Directors of companies are not paid any sitting fees for attending meeting of board of directors of the company. Mostly, this is because of the remuneration terms fixed for them by the board of directors and approved by the shareholders and also generally, the articles of associations of most of the companies contains an article which restricts payment of sitting fees to Managing / Wholetime Directors.

However, as there is no restriction in the companies act, the company can amend such article in the article of association by passing special resolution in the shareholder meeting for allowing payment of sitting fees to MD and WTD.

Applicability of Service Tax on Payment of Sitting Fees to Directors

Service Tax is payable only on the amounts paid to the directors other than in lieu of their capacity as employee of the company. Furthermore, the non-executive directors of the company are not paid salary as they are not involved in executing/managing day to day affairs of the company. Therefore, the sitting fees/commission etc. payable to non-executive directors and the executive/whole time directors/managing directors is leviable to service tax. However, amount paid as salary for which TDS is deducted under section 192 of the Income Tax Act, 1961 is not leviable to service tax as the said amount is received by the directors in lieu of their employment with the company.

If there is an employee-employer relationship, then there is no service tax liability and, hence, no question of reverse charge can arise. Reverse charge provisions can apply only if a service is otherwise taxable. Therefore, Service tax is not payable in case of a Managing Director or a Whole-time Director or Executive Director, if the Director is in full time employment of the company.

Service tax will be payable on Sitting fees paid to independent (non-employee) Directors for attending meetings of the Board and the Committees of Board, travelling and incidental expenses for attending such meetings, commission or other remuneration paid, if any.
Liability to pay Service Tax

According to Rules 2(1)(d)(EE) of the Rules read with Notification No. 30/2012-ST, dated 20-6-2012 amended w.e.f. 7-8-2012, the Company receiving the services of Directors is liable to pay Service tax under reverse charge mechanism.
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