RCM liability on director sitting fees vs executive director salary

In our monthly reconciliation casework across mid-sized companies, corporate finance teams often handle multiple forms of remuneration paid to company directors. Payments typically include monthly payroll transfers to managing directors, sitting fees for board and audit committee meetings, and performance commissions disbursed at year end. Grouping all director disbursements under a single administrative ledger creates substantial audit exposure. Tax departments frequently issue notices demanding reverse charge GST on executive salaries, while companies frequently overlook reverse charge liabilities on sitting fees paid to independent directors.

The Central Board of Indirect Taxes and Customs addressed this exact problem in CBIC Circular No. 140/10/2020-GST. By reviewing the statutory contract of engagement and the corresponding Income-tax TDS classification, the circular establishes a clear dividing line: contractual executive salary is an employer-employee transaction exempt from GST under Schedule III, whereas independent sitting fees and non-employee professional commissions fall squarely under reverse charge under Section 9(3) of the CGST Act.

Statutory basis for reverse charge under Notification 13/2017-Central Tax (Rate)

Reverse charge on corporate director services is imposed under Section 9(3) of the CGST Act. Under this section, the central government notified categories of services where the recipient entity must pay tax. Entry 6 of Notification No. 13/2017-Central Tax (Rate), dated 28 June 2017, as set out in the official CBIC reverse charge schedule, provides:

“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 Entry 6, the supplier of service is the director, and the recipient is the company or body corporate located in the taxable territory. The applicable tax rate is 18 percent (9 percent CGST plus 9 percent SGST for intra-state transactions, or 18 percent IGST for inter-state transactions). The company must compute the tax, deposit it with the government, and report the transaction in its monthly return.

Executive director salary versus independent director sitting fees under Circular 140

To determine whether a specific payment to a director attracts reverse charge or is outside GST, finance teams must apply the dual test clarified in CBIC Circular No. 140/10/2020-GST:

First, for executive directors (whole-time directors and managing directors), an executive director operates under a contract of service with the company. When their remuneration is booked under salary heads in the company accounts and subjected to Tax Deducted at Source (TDS) under Section 192 of the Income-tax Act, 1961, the relationship is that of employer and employee. Under Schedule III Entry 1 of the CGST Act, services by an employee to the employer in the course of employment are treated as neither a supply of goods nor a supply of services. Consequently, no GST applies, and no reverse charge liability arises.

Second, for independent and non-executive directors, under Section 149(6) of the Companies Act, 2013, an independent director cannot be an employee of the company. Board sitting fees, audit committee allowances, and commissions paid to independent or non-executive directors are not employee remuneration. These payments are subjected to TDS under Section 194J of the Income-tax Act as fees for professional or technical services. Because there is no employer-employee relationship, these services do not qualify for Schedule III relief. They fall squarely under Entry 6 of Notification No. 13/2017-Central Tax (Rate), making the company liable to pay 18 percent GST under reverse charge.

Third, for dual capacity payments to executive directors, if an executive director receives contractual salary under Section 192 and separately receives commercial fees or consultancy retainers subjected to TDS under Section 194J, the two streams are treated separately. The salary portion is covered by Schedule III, while the professional consultancy portion is taxable under GST.

Cash ledger payment mandate under Section 49(4)

A widespread error among accounts departments is attempting to adjust reverse charge liability against existing input tax credit balances in the electronic credit ledger. The statutory provisions governing credit utilization strictly prohibit this practice:

• Restriction under Section 49(4): Under Section 49(4) of the CGST Act, amounts available in the electronic credit ledger can be used solely for discharging output tax liability.
• Definition of output tax: Section 2(82) of the CGST Act defines output tax as the tax chargeable on taxable supply of goods or services made by the taxpayer, but explicitly excludes tax payable by him on a reverse charge basis.
• Mandatory cash payment: Because RCM is excluded from output tax, it cannot be settled using credit ledger balances. The company must deposit cash into the electronic cash ledger using Form GST PMT-06 and pay the full liability in cash in Table 6 of Form GSTR-3B.

Input tax credit eligibility and documentation under Section 16

Once reverse charge liability on director sitting fees is paid in cash, the company is entitled to recover that cash outflow as input tax credit. Under Section 2(62) of the CGST Act, the statutory definition of input tax explicitly includes tax payable under Section 9(3). The company satisfies the fundamental requirements of Section 16 of the CGST Act through the following sequence:

For business purpose under Section 16(1), board deliberations, corporate governance, and statutory oversight directly relate to the operation and furtherance of corporate business.

For the self-invoicing requirement under Section 16(2)(a), independent directors are rarely registered under GST. Because the supplier is unregistered, the recipient company must issue a self-invoice under Section 31(3)(f) of the CGST Act within the prescribed time limit. Under Rule 36(1)(b) of the CGST Rules, this self-invoice serves as the legal document for availing credit. The company must also issue a payment voucher under Section 31(3)(g) upon disbursing the fees.

For actual receipt of service under Section 16(2)(b), board minutes and attendance registers verify that the meetings were conducted and attended by the respective directors.

For payment of tax to government under Section 16(2)(c), the company fulfills this condition by paying the tax through the electronic cash ledger in Table 6 of Form GSTR-3B.

For filing return under Section 16(2)(d), the company files its return in Form GSTR-3B under Section 39.

Because the cash tax payment and the credit claim occur within the same tax period, the company declares its reverse charge liability in Table 3.1(d) and simultaneously avails the credit in Table 4(A)(3) of Form GSTR-3B. There is no requirement to wait for a subsequent month to claim the credit.

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

To report director transactions accurately without generating system warnings or mismatch notices, follow this established portal workflow detailed in the GSTN GSTR-3B user manual:

1. Isolate monthly transactions: Extract the director ledger from your ERP (such as Tally Prime, SAP, or Zoho Books). Separate payments subjected to Section 192 TDS (executive salary) from payments subjected to Section 194J TDS (sitting fees and commissions).
2. Prepare self-invoices: For all Section 194J sitting fees paid to unregistered directors, generate self-invoices under Section 31(3)(f) with a unique sequential numbering series complying with Rule 46(b).
3. Declare liability in Table 3.1(d): On the GST portal, open Form GSTR-3B. In tile 3.1, enter the total sitting fees under the taxable value column of line 3.1(d) ("Inward supplies liable to reverse charge"). Enter the corresponding 18 percent tax (9 percent CGST plus 9 percent SGST, or 18 percent IGST). Executive salary is completely omitted from Table 3.1.
4. Avail credit in Table 4(A)(3): Open tile 4 ("Eligible ITC"). Enter the exact RCM tax amount in line 4(A)(3) ("Inward supplies liable to reverse charge (relating to eligible ITC)"). Do not enter this amount in Table 4(A)(5) ("All other ITC"), as Table 4(A)(5) is reconciled against supplier-filed invoices in GSTR-2B.
5. Discharge liability in Table 6: Proceed to payment. In Table 6.1 ("Payment of Tax"), verify that the reverse charge liability in row 3.1(d) is paid solely through the electronic cash ledger. Adjust other outward tax liabilities using available ITC as permitted by credit set-off rules.
6. File the return: Complete verification and submit Form GSTR-3B using DSC or EVC before the monthly deadline (20th of the following month).

Worked rupee example of director remuneration and RCM liability

Consider Apex Precision Components Private Limited, a manufacturing company registered in Pune, Maharashtra. During October 2026, the company accounts for the following director disbursements:

• Managing Director monthly salary: ₹5,00,000 paid under employment contract, booked as director remuneration in profit and loss, with TDS deducted under Section 192.
• Whole-time Technical Director salary: ₹3,00,000 paid under employment contract, with TDS deducted under Section 192.
• Independent Director sitting fees: ₹1,20,000 paid to three independent directors (₹40,000 each) for attending two board meetings, with TDS deducted under Section 194J. All three directors are unregistered under GST.
• Audit Committee commission: ₹80,000 paid to an independent director as committee governance commission, with TDS deducted under Section 194J.

In this monthly tax period, Apex Precision Components accounts for the transactions with exact precision:

1. The combined executive salaries of ₹8,00,000 (MD ₹5,00,000 plus Technical Director ₹3,00,000) represent services by employees to their employer under Schedule III Entry 1. These amounts are non-supplies under GST, so no tax is calculated or paid.
2. The independent director sitting fees (₹1,20,000) and committee commission (₹80,000) total ₹2,00,000 in taxable value. These amounts are subject to reverse charge under Entry 6.
3. The company generates self-invoices under Section 31(3)(f) for ₹2,00,000. Because the transactions are intra-state, the GST liability at 18 percent comprises 9 percent CGST (₹18,000) and 9 percent SGST (₹18,000), totaling ₹36,000.
4. In Form GSTR-3B for October 2026, the company enters ₹2,00,000 taxable value and ₹36,000 tax in Table 3.1(d).
5. The company deposits ₹36,000 into its electronic cash ledger and discharges the liability in cash in Table 6.
6. In the same return, the company enters ₹36,000 in Table 4(A)(3), claiming the full amount as eligible input tax credit. The net financial impact on the company is a temporary cash flow deployment of ₹36,000, fully recovered as credit to offset future outward liabilities.

GSTR-2B reconciliation and common audit traps

A frequent compliance trap during monthly reconciliation between the purchase register and GSTR-2B relates to unregistered supplier transactions:

Unregistered directors and GSTR-2B: Because independent directors are typically unregistered, they do not file Form GSTR-1. Therefore, no invoice appears in the company's GSTR-2B. Inexperienced accountants sometimes mistakenly look for these invoices in GSTR-2B, or worse, report the self-invoice credit in Table 4(A)(5) ("All other ITC"). When the GST portal compares Table 4(A)(5) against GSTR-2B, it flags an unexplained mismatch and generates automated scrutiny notices in Form DRC-01C under Rule 88D.

Registered directors: If a director operates a separate registered consultancy firm and bills the company under their GSTIN, that invoice will appear in GSTR-2B. If the service relates to their official capacity as a director, the invoice must reflect the reverse charge flag "Y", auto-populating Table 3.1(d) and Table 4(A)(3). If the invoice represents independent commercial consulting outside board governance, it follows normal forward charge rules as clarified in GST Circular 218 taxability of director services. For related governance and credit topics, review our guides on RCM on director remuneration and RCM on renting of residential property.

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Frequently asked questions

Last checked: 19 October 2026. Sources: CBIC Circular No. 140/10/2020-GST, CGST Act Section 9, CBIC Reverse Charge Services Schedule (Notification No. 13/2017-CT(Rate)), CGST Act Section 7 and Schedule III, CGST Act Section 16, CGST Act Section 49, GSTN GSTR-3B User Manual.