Taxation of Director’ Remuneration

Does presumptive tax apply?

Mea culpa! I am deviating from the practice of writing on subjects which have a more general appeal and relevance, and straying into a topic likely to have fewer eyeballs and equally where my knowhow may be falling short of the expertise needed to opine with authority! Nevertheless, indulging myself further in the matter as the issue cropped up recently from a few quarters who are impacted.

Traditionally the office of a corporate director was quite privileged, and restricted to a close club of individuals answering to a well-defined criterion that kept a whole host competent persons out.

With the advent of the compulsion to have ‘independent directors’ on the boards of not only publicly listed entities but even unlisted public companies, the universe of the persons being appointed to this position has certainly enlarged significantly.

The remuneration attached to this position has also changed with the times and persons who are directors in multiple entities have bulging pockets from fees and commission. Hence the concern of how it is taxed.

In the Finance Act,2016 a new section was introduced to simplify the taxation of professionals whose income from the specified professions is less than Rs 50lacs. The explanatory note provided as part of the Finance Bill,2016 is extracted to appreciate the scope of this provision.

“The existing scheme of taxation provides for a simplified presumptive taxation scheme for certain eligible persons engaged in certain eligible business only and not for persons earning professional income. In order to rationalize the presumptive taxation scheme and to reduce the compliance burden of the small tax payers having income from profession and to facilitate the ease of doing business, it is proposed to provide for presumptive taxation regime for professionals. In this regard, new section 44ADA is proposed to be inserted in the Act to provide for estimating the income of an assessee who is engaged in any profession referred to in sub-section (1) of section 44AA such as legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette and whose total gross receipts does not exceed fifty lakh rupees in a previous year, at a sumequal to fifty per cent. of the total gross receipts, or, as the case may be , a sum higher than the aforesaid sum earned by the assessee. The scheme will apply to such resident assessee who is an individual, Hindu undivided family or partnership firm but not Limited Liability partnership firm. Under the scheme, the assessee will be deemed to have been allowed the deductions under section 30 to 38. Accordingly, the written down value of any asset used for the purpose of the profession of the assessee will be deemed to have been calculated as if the assessee had claimed and had actually been allowed the deduction in respect of depreciation for the relevant assessment years. It is also proposed that the assessee will not be required to maintain books of account under sub-section (1) of section 44AAand get the accounts audited under section 44AB in respect of such income unless the assessee claims that the profits and gains from the aforesaid profession are lower than the profits and gains deemed to be his income under sub-section (1) of section 44ADAand his income exceeds the maximum amount which is not chargeable to income-tax.”

As explicitly provided, the object is to adopt a presumptive approach to taxation to lighten the burden of both the taxpayers and the tax authorities. The sweep however is restricted to such professions specifically mentioned in Section 44AA of the income tax Act and any such as may be notified by the CBDT.

The role of a director in the present complex business environment is nothing less than professional. It may be that a director has the requisite academic credentials or practical experience sans the academic qualification, but little doubt would exist that the nature of the responsibilities discharged on any corporate board is anything short of professional work.

Section 194J is the provision under which the companies that pay the remuneration deduct tax. 194J covers both professions that are specified and managerial and technical services. Most likely the director’ fees fall under managerial category for the purpose of this section.

Directors would be entitled to offer their remuneration whether as sitting fees or commission as income from profession.

The question is whether the dispensation as provided under section 44ADA would apply to such cases where the total income is less than Rs50lacs specified therein.

Section 44ADA is applicable only to such professions as specified therein. Board positions like that of a director is not one of those. However, a director may have the requisite qualification to fit into one of the professions specified. For example, a person with the qualification as a chartered accountant or a company secretary may be serving a director.

Does the academic qualification decide whether the person is carrying on a profession? This poses a tricky question. Given the complexities of corporate regulations, boards seek functional expertise to get the right diversity of knowledge and experience to support the corporate’ functioning.

How far can this reality define if a director with the necessary qualification as an accountant is practicing the profession when filling up a board seat?

The point becomes moot when the person concerned is not actively in practice but only holding board positions. However, a person active in profession with a requisite certificate of practice may be able to put forth the contention that the board remuneration together with the remuneration from actual accounting practice should be considered for the applicability of sec 44ADA.

For a professionally qualified person without a larger presence in the actual practice of the profession this contention may become questionable.

Another way to examine this issue is the parity between the treatment for directors with different qualifications. A chartered accountant or lawyer or a company secretary automatically qualifies under this provision. However, a management expert or a retired bureaucrat without the said qualification would not. In such a case even among directors as a class there would be divergence in the treatment of the same income.

Another aspect is that the section was introduced to smoothen expense claims for small professionals. A directorship simpliciter necessitates little relevant expenses in the exercise of the office. In practice every possible expense attributable to holding such a position is paid by the company concerned. The only possible expenses could be the professional membership fees and a small part of the expenses on communication and other incidental expenses. However, this is a question of fact in each instance and no generalization is possible.

In summary, the benefit of 44ADA for director’ remuneration is not straightforward and may be contentious.

It is also to be noted that once the remuneration is classified as professional income, advance tax provisions become applicable even for senior citizens, which most directors would be!!  

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