Dated 28th June 2013
Ministry of Corporate Affairs, Government of India vide Central Circular No. 24/2012 dt. 9th August, 2012 on the issue of Applicability of Service Tax on commission payable to Non-Whole Time Directors of a company under section 309(4) of the Companies Act, 1956 & approval of Central Government under section 309/310 of the Companies Act has clarified as under:-
The Finance act 2012 has introduced Service Tax which is applicable to anyone who provides a Service not covered under the negative/exempted list and if the value of annual revenue is more than Rs. 10 lakh. The Non-Whole Time Directors of the Company are presently not covered under the exempted list and as such, the sitting fee/commission payable to them by the company is liable to Service Tax.
If such Service Tax is paid by the company, it will be deemed to be a part of remuneration under section 198 of the Act and would accordingly increase the remuneration amount of such Non-Whole Time Directors. This remuneration could them exceed the limit of 1% profit [u/s 309(4)] of the company when the company has a Managing/ Whole Time Directors/Managers or 3% of the profit [u/s 309(4)] of the company if the company does not have a Managing/Whole Time Directors/managers, as the case may be. As per existing provisions of the Companies Act, 1956, this would require prior approval of Central Government u/s 309 and 310 of the Act.
If has now been decided that any increase in remuneration of Non-Whole Time Directors(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under Section 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit [u/s 309(4)] of the company, as the case may be, in the Financial year 2012-13.
SOURCE: GOVT. OF INDIA, Ministry of Finance