Is the Executive Director provide Professional Consultancy Services to Company?
An Executive Director can indeed provide consultancy or professional services to the company, While an Executive Director can provide consultancy services, it must be managed with transparency, appropriate oversight, and compliance with legal requirements to avoid conflicts of interest and maintain the company’s integrity. Ensuring proper disclosure and obtaining necessary approvals are critical steps in this process.
Key Compliance to be taken care under various Relevant Acts:
Under the Companies Act, 2013 Scenario:
- A whole-time director as defined in clause (94) of section 2 of the Act is referred to as a “Executive Director” under clause 2(k) of the Companies (Specification of definitions details) Rules, 2014. This refers to a director who works full-time for a company and is known as a whole-time or managing director. Normally, Executive Director manages the company’s management and administration as an executive.
- As per Section 197(4) of company act 2013. Remuneration for professional services does not count as director’s remuneration if the director possesses necessary qualifications and the services are approved by the remuneration committee. Moreover that As per Section 197(4) of company act 2013 Section 188 Consultancy fees may be considered a related party transaction requiring board and possibly shareholder approval if not conducted at arm’s length.
- The previous approval of the members of the company is not required for such kind of payments, & it would be in order if the payment as approved by the Board of Director, is subject to approval of members either by special resolution or ordinary resolution as required depending upon the provisions in the Articles of association of company.
- If a director is paid by the company more than what he has a legal right to for performing professional services and that payment is not made in the normal course of business or on an arm’s length basis, then the director is undoubtedly holding an office or place of office within the company. In these situations, the Board’s approval is required under Section 188 as this results in a Related Party Transaction. Furthermore, according to Rule 15 of the Companies (Meetings of Board and It Powers) Rules, 2014, if threshold restrictions for such payments are exceeded, the related party transaction will additionally need shareholder approval under Section 188. This provision in addition to the seeking their approval under Section 197(4).
Under the Income Tax Act a scenario:
- The remuneration earned for serving as a director of the company is classified as salary under the Income Tax Act, is subject to head salary taxation, and is subject to tax deduction by the company under section 192 of the Income-tax Act.
- On the other hand, TDS is deducted under section 194J1(ba) and the director’s professional income is taxed under the heading Income from Business and Profession. If any amount is given to a director of a company in the form of compensation or fees other than those on which tax is deductible under section 192, the tax in this section is subtracted.
- Director’s Remuneration Treated as salary and taxed accordingly. Professional Income: Consultancy fees are treated as business income and taxed under different provisions (Section 194J1(ba)).
- The income subject to reporting under section 44ADA under the heading “Business and profession” may be made. In accordance with Income Tax Act section 44ADA, According to Section 44ADA of the Income Tax Act, the 2 requirements that follow must be satisfied in order to select the Presumptive Taxation Scheme:
- The gross receipts for the profession shall not exceed INR 50 lakh.
- At least 50% of the gross receipts must be disclosed as income by the taxpayer in the ITR.
Under the GST Act, a scenario:
- Remuneration Paid to executive directors is not subject to GST. Consultancy Fees: Paid to executive and non-executive directors is subject to GST.
The remuneration that is given to the company’s executive director is exempt from GST. Yet the GST extends to the executive director’s consulting fees as well as the non-executive director’s remuneration.
key compliance Considerations :
Several key considerations must be taken into account to ensure compliance with corporate governance standards, legal regulations, and to avoid conflicts of interest.
- Conflict of Interest
- An Executive Director must act in the best interests of the company and its shareholders. Consultancy roles might lead to conflicts between personal interests and company interests. Proper oversight by independent directors or a dedicated committee can help mitigate these conflicts.
- Executive Directors are deeply involved in strategic decisions and day-to-day operations. Any additional consultancy work should not detract from their primary responsibilities.
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- Compensation for consultancy services must be fair and align with market rates to avoid undue benefits. Disclosure of consultancy fees is crucial to maintain transparency.
- Corporate Governance and Disclosure:
- Adherence to good corporate governance practices involves full disclosure of directors’ interests. Consultancy arrangements should be disclosed to shareholders and stakeholders.
- Legal and Regulatory Compliance:
- Section 197(4) of Companies Act, 2013: Allows for additional professional remuneration provided the director possesses the requisite qualifications and the remuneration committee approves it. Section 188 of Companies Act, 2013: Addresses related party transactions, necessitating board and possibly shareholder approval if the consultancy fees are not at arm’s length.
- Approval and Oversight:
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- Any consultancy arrangement should be approved by the board, especially the non-executive or independent directors. Moreover that Member Approval Depending on the articles of the company, member approval may also be required.
The aforementioned sections of the Income Tax Act, the Companies Act, and the GST Law expressly permit an Executive Director who meets the necessary requirements to offer consulting services to the Company and be paid for such services.
In conclusion,
- An Executive Director can indeed provide consultancy or professional services to the company, While an Executive Director can provide consultancy services, it should be noted that although an Executive Director may offer consulting services to the same business, this should be done so cautiously and after giving due attention to any potential conflicts of interest, legal compliance, and corporate governance requirements. To manage potential risks and preserve the integrity of the business’s operations and decision-making processes, it is essential to seek legal advice and make sure that appropriate disclosure and oversight are in place. For more detailed guidance and compliance management, reaching out to corporate governance experts like Rajput Jain and associates can provide the necessary support and expertise.
- We provide complete end-to-end management of secretarial and corporate governance compliances, encompassing all entity life cycle stages. Please send an email to if you would want further information about the requirements for compliance and to outsourcing to us. Please write to our expert Team Swatantra Kumar Singh at the mail ID singh@carajput.com Lead – Corporate Compliances at singh@caindelhiindia.com
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