RCM on director remuneration: liability, cash payment, and ITC eligibility

Corporate finance teams frequently grapple with the GST treatment of payments made to directors. Board sitting fees, advisory retainers, professional fees, and monthly executive remuneration often get lumped together in trial balances. This confusion leads to two severe audit errors: either companies fail to pay mandatory reverse charge on non-executive director fees, attracting tax demands with interest, or they wrongly pay GST on genuine employee salaries. Knowing the legal boundary between employment and independent service ensures statutory compliance while preserving cash flow.

Statutory basis: Notification 13/2017-Central Tax (Rate) Entry 6 and Section 9(3)

The reverse charge mechanism for corporate director services is established under Section 9(3) of the CGST Act. Through Notification No. 13/2017-Central Tax (Rate), dated 28 June 2017, the central government notified categories of services where the recipient company bears total tax liability. You can verify the entry in the official CBIC reverse charge schedule.

Entry 6 of Notification 13/2017-Central Tax (Rate) states:

“Services supplied by a director of a company or a body corporate to the said company or the body corporate.” Entry 6, Notification 13/2017-Central Tax (Rate)

Under this notification, the service supplier is the director, and the recipient is the company or body corporate located in the taxable territory. The applicable GST rate is 18 percent (9 percent CGST and 9 percent SGST for intra-state transactions, or 18 percent IGST for inter-state transactions). The company must calculate and discharge this tax directly.

CBIC Circular 140/10/2020-GST: salary versus professional remuneration

To eliminate widespread litigation and disputes across field formations, the Central Board of Indirect Taxes and Customs issued Circular No. 140/10/2020-GST on 10 June 2020. The circular establishes a clear two-part test based on company law definitions and income tax treatment.

1. Independent and non-executive directors

An independent director appointed under Section 149(6) of the Companies Act, 2013, or a non-executive nominee director, is not an employee of the company. Sitting fees, commission, and meeting allowances paid to these directors fall squarely under Entry 6 of Notification 13/2017-Central Tax (Rate). The company must pay GST under reverse charge on the gross amount paid.

2. Whole-time, executive, and managing directors

For whole-time directors, managing directors, and executive directors, remuneration must be examined under the terms of their appointment contracts:

1. Salary component (Schedule III): Any portion of remuneration that is paid as salary under an employer-employee agreement and subjected to Tax Deducted at Source (TDS) under Section 192 of the Income-tax Act, 1961 is governed by Schedule III of the CGST Act. Schedule III covers services by an employee to the employer in the course of employment. This portion is neither a supply of goods nor a supply of services. No GST is leviable, and no reverse charge applies.
2. Professional or technical fee component (Reverse Charge): Any portion of remuneration paid for services outside the employment contract, such as professional consulting fees, and subjected to TDS under Section 194J of the Income-tax Act, 1961 as fees for professional or technical services, constitutes a taxable supply. The company must pay GST under reverse charge at 18 percent on this amount.

Clarification on personal capacity services (Circular 201/13/2023-GST)

CBIC further clarified via Circular No. 201/13/2023-GST that services provided by a director in a personal or private capacity do not fall under Entry 6. For example, if a director leases personal commercial premises to the company, that transaction represents a service provided as an individual property owner rather than in the capacity of a director. It does not attract reverse charge under Entry 6.

Cash ledger payment mandate under Section 49(4)

A fundamental rule governing reverse charge is the payment mechanism. Companies cannot use existing balances in their electronic credit ledger to pay reverse charge liabilities.

Under Section 49(4) of the CGST Act, the electronic credit ledger may be utilized only for making payments toward output tax. Section 2(82) of the CGST Act explicitly defines output tax and states that it excludes tax payable by a person on reverse charge basis. Therefore, tax on director remuneration must be paid in cash through the electronic cash ledger.

Section 16 conditions for claiming input tax credit

Once the company pays the reverse charge tax in cash, is it entitled to claim that tax back as input tax credit? Yes. Under Section 2(62) of the CGST Act, input tax explicitly includes tax payable under Section 9(3). The company can avail the credit by satisfying the statutory conditions of Section 16 of the CGST Act:

1. Business purpose (Section 16(1)): The director services must be used or intended to be used in the course or furtherance of the company business operations. Board oversight, strategic governance, and technical advisory services fulfill this requirement.
2. Possession of tax-paying document (Section 16(2)(a)): If the director is unregistered under GST, the company must issue a self-invoice under Section 31(3)(f) and a payment voucher under Section 31(3)(g). Under Rule 36(1)(b) of the CGST Rules, this self-invoice serves as the legal tax-paying document. If the director is registered and issues a tax invoice, that invoice serves as the basis.
3. Receipt of services (Section 16(2)(b)): The board meetings, committee evaluations, or advisory sessions must have actually been attended or delivered.
4. Payment of tax to government (Section 16(2)(c)): The company must discharge the reverse charge liability in cash during return filing.
5. Filing of return (Section 16(2)(d)): The company must furnish its monthly return in Form GSTR-3B under Section 39.

Because the company pays the tax in cash in Table 6 of Form GSTR-3B, the tax is considered paid to the government in that tax period. Therefore, the company can claim the input tax credit in Table 4(A)(3) of the very same monthly return. There is no requirement to postpone the credit claim to the subsequent month.

Step-by-step reporting in Form GSTR-3B

Follow this exact monthly accounting and filing sequence to report director remuneration without triggering discrepancy notices:

1. Classify the payment: Segregate payments between executive salary (Schedule III, non-GST) and professional or sitting fees (taxable under RCM). Check that TDS was deducted under Section 194J for RCM items.
2. Issue self-invoice: For unregistered directors, generate a self-invoice with a unique serial number under Section 31(3)(f) on the date fees are approved or paid. Record the payment voucher under Section 31(3)(g).
3. Report liability in Table 3.1(d): When preparing Form GSTR-3B on the GST portal, enter the gross taxable fee and calculated tax in Table 3.1(d) (inward supplies liable to reverse charge). For return instructions, consult the GSTN GSTR-3B user manual.
4. Discharge liability in cash: Create a challan using Form GST PMT-06 and deposit funds into the electronic cash ledger. Offset the Table 3.1(d) liability in cash in Table 6.
5. Claim input tax credit in Table 4(A)(3): Enter the paid tax amount in Table 4(A)(3) (inward supplies liable to reverse charge). This instantly credits the amount to your electronic credit ledger, making it available to offset outward tax liabilities on sales.

Worked rupee example: monthly director payments

Consider Apex Precision Engineering Private Limited, a manufacturing company in Pune, Maharashtra. In September 2026, the company processes three distinct payments to its directors:

• Managing Director salary: ₹3,00,000 monthly contractual salary, subjected to TDS under Section 192 of the Income-tax Act.
• Independent Director sitting fees: ₹1,00,000 paid to an independent director for attending audit committee and board meetings, subjected to TDS under Section 194J.
• Executive Director technical advisory fee: ₹1,50,000 paid to a technical director for special machinery designs outside his employment contract, subjected to TDS under Section 194J.

In this example, the ₹3,00,000 salary is exempt from GST under Schedule III. The remaining ₹2,50,000 attracts GST under reverse charge at 18 percent (₹22,500 CGST and ₹22,500 SGST, totaling ₹45,000). Apex Precision Engineering files its September 2026 GSTR-3B by 20 October 2026:

1. It reports ₹2,50,000 taxable value and ₹45,000 tax in Table 3.1(d).
2. It deposits ₹45,000 into the electronic cash ledger and settles the liability in Table 6.
3. It claims ₹45,000 as input tax credit in Table 4(A)(3).

The entire ₹45,000 paid in cash becomes available in the credit ledger to offset outward liabilities on manufactured goods, resulting in zero net tax loss for the business.

GSTR-2B reconciliation and audit checks

During monthly books closure and reconciliation against GSTR-2B, finance teams must distinguish between registered and unregistered directors:

Unregistered directors: Most individual directors do not hold a personal GST registration. In this scenario, nothing appears in GSTR-2B Table 4(A)(3). Accountants must rely on internal accounting vouchers and self-invoices issued under Section 31(3)(f). Compare your ledger with our guide on RCM invoices in GSTR-2B Table 4 matching.

Registered directors: If a director operates a proprietary firm or holds an active GSTIN and quotes the company GSTIN on their invoice, the record appears in GSTR-2B Table 4(A)(3) with the reverse charge flag set to Y. Review our checklist on ITC claim rules under GST to verify proper documentation.

Avoiding DRC-01C mismatch notices: If you claim director RCM credit in Table 4(A)(5) ("All other ITC") instead of Table 4(A)(3), the GST portal compares Table 4(A)(5) against normal supplies in GSTR-2B. Because no supplier invoice exists in 2B for an unregistered director, the system triggers automated mismatch notices under Form DRC-01C. Always route reverse charge credits strictly through Table 4(A)(3). Review our guide on GSTR-2B vs GSTR-3B ITC mechanics to keep return disclosures consistent.

Related guides

• RCM on legal services by advocate: liability, cash payment, and ITC eligibility
• RCM liability on director sitting fees vs executive director salary
• RCM on import of technology transfer IPR royalties
• ITC eligibility on employee term insurance and mandatory gratuity

Frequently asked questions

Last checked: 14 October 2026. Sources: CBIC Circular 140/10/2020-GST, CGST Act Section 9, CBIC Reverse Charge Services Schedule (Notification 13/2017-CT(Rate)), CGST Act Section 7 & Schedule III, CGST Act Section 16, CGST Act Section 49, GSTN GSTR-3B User Manual.