GST Compliance 2026: Smarter GSTR-3B, Fair Interest & ITC Automation – What Every Taxpayer Must Know

 By CA Surekha Ahuja

"Automation is not just a convenience—it’s the new compliance frontier."

The January 2026 GSTN advisory ushers in a new era of precision, fairness, and automation in GSTR-3B filing. Effective this month, these updates impact interest calculation, ITC utilization, filing processes, and registration controls, affecting MSMEs, large businesses, auditors, and CA practices alike.

Understanding and adapting to these changes is no longer optional—failure to comply can result in interest disputes, ITC loss, blocked filings, and GSTIN suspension.

Key Enhancements in GSTR-3B

Smarter Interest Calculation (Table 5.1)

Interest is now calculated after considering the minimum cash balance in the Electronic Cash Ledger (ECL), ensuring fair computation and reducing unnecessary litigation under Section 50.

Formula (Rule 88B & Section 50 CGST Act):

$$\text{Interest} = (\text{Net Tax Liability} - \text{Minimum ECL Balance}) \times \frac{\text{Delay Days}}{365} \times \text{Applicable Rate}$$

Highlights:

• Auto-populated in Table 5.1; downward edits disabled.

• Represents minimum payable interest; upward self-assessment may be necessary.

• Encourages fairer tax practices and improved compliance transparency.

Auto-Population of Tax Liability (Table 6.1)

• Late-reported supplies via GSTR-1/1A/IFF are now auto-classified by period, ensuring precise linkage of supply and payment periods.

• Auto-populated figures are suggestive; taxpayers may adjust upwards as needed.

Impact:

• Minimizes manual errors in period classification.

• Streamlines reconciliation and reporting workflows.

Flexible ITC Cross-Utilization (Table 6.1)

• Post-IGST credit exhaustion, CGST & SGST ITC can be used in any order to settle IGST liability.

• Removes rigid utilization sequences, optimizing cash flow and improving liquidity.

ITC & Filing Blocks:

• Filing is blocked if ITC claims exceed ledger balances:

  • Reclaimable ITC ≤ Closing Reclaim Ledger + Current Reversals

  • RCM ITC ≤ RCM Ledger

• Pre-reconciliation with GSTR-2B is essential to prevent submission halts and permanent ITC loss.

Late Fees & Time-Bar Enforcement

• GSTR-9/9C late fees are auto-applied: ₹50–200/day, capped at 0.04–0.05% of turnover.

• Returns older than 3 years are time-barred; ITC claimed may be permanently lost.

Registration & Compliance Controls

• Bank details must be updated within 30 days of registration or before filing GSTR-1/IFF.

• Non-compliance triggers automatic GSTIN suspension, blocking returns and e-way bills.

• Annual recalculation of AATO thresholds (₹20/40 lakh) ensures proper registration and prevents penalties.

Business & Compliance Impacts

Aspect	Benefit / Relief	Risk / Challenge
Interest	Fair computation via ECL offset; reduced litigation	Requires upward self-assessment to avoid additional demands
ITC Use	Flexible cross-utilization enhances cash flow	Filing blocks enforce strict pre-reconciliation
Filing Accuracy	Automated calculations minimize errors	Time-bars & system blocks risk ITC loss
Overall Compliance	Transparency & reduced disputes	Portal-driven enforcement increases compliance burden

Action Points for CA Firms & Tax Professionals

• Update SOPs for:

  • ECL monitoring

  • GSTR-2B reconciliation

  • Client advisory on GSTIN suspension risks

• Conduct proactive AATO checks to prevent unintended registration breaches.

• Guide clients on upward self-assessment of interest to align with auto-calculated figures.

• Optimize ITC utilization to enhance liquidity and compliance efficiency.

The Takeaway

The January 2026 GSTR-3B enhancements are not just technical changes—they are a shift toward automated, fair, and transparent compliance. While these updates reduce manual errors and litigation, they also demand vigilance: reconciliations, ECL monitoring, and proactive ITC management are now critical to avoid permanent ITC loss, filing blocks, and GSTIN suspension.

In GST compliance, automation is a friend—but awareness and diligence remain your strongest safeguards.

For professionals, the message is clear: adapt SOPs, educate clients, and embrace automation strategically—the future of GST compliance is now smarter, faster, and fairer.

Delhi Jal Board LPS Waiver 2026 – Amended, Expanded, and Extended Till 15 August

 The Delhi Jal Board (DJB) Late Payment Surcharge (LPS) Waiver Scheme has been amended and extended until 15 August 2026, now covering domestic and non-domestic consumers, including commercial, institutional, government, and large private connections.

Benefit: Eligible consumers can settle old dues by paying only the principal, with full waiver of accumulated surcharge, if payment is made within the extended period.

Why the Extension and Amendment Matter

The scheme addresses long-pending arrears caused by:

• Disputed bills

• Incorrect surcharge computation

• Unadjusted past payments

• Outdated consumer records or KYC

Intent: Convert arrears into collectible principal while ensuring accurate, verified billing. Voluntary, correction-led payment is prioritised over coercion.

What Consumers Must Do

1. Verify dues: Check your KNO on the DJB portal.

2. File grievances online for:

   • Billing errors

   • Surcharge disputes

   • Payment mismatches

   • KYC or category corrections

3. Pay principal only after correction is reflected.

4. Keep records: Download updated bills and receipts.

⚠️ Tip: Portal-based grievances create a traceable record and reduce delays.

Administrative Measures for Effective Implementation

• Correct billing and data errors before recovery action.

• Zonal offices must act only on portal-registered grievance IDs.

• Recovery must remain on hold for pending disputes.

• LPS waiver must automatically reflect once principal is paid.

Key Takeaways

• The final extended window till 15 August 2026 is for orderly resolution of old dues.

• Scheme succeeds only if correction precedes payment.

• True impact is measured by:

  • Cleaned accounts

  • Fewer disputes

  • Stronger credibility of the billing system

Bottom Line: Accurate bills + transparent grievance resolution + timely principal payment = real benefit for both consumers and the system.

Corporate Restructuring in India 2026: Closing Tax, GST & Buyback Gaps

By CA Surekha S Ahuja

India’s corporate landscape is witnessing an unprecedented wave of pre-IPO reorganisations, mergers, demergers, and cross-border M&A. From digital startups to established industrial groups, companies are actively reshaping structures to unlock efficiencies, streamline portfolios, and maximise shareholder value.

Yet, even “compliant” business transfers often fail — not for ignorance of law, but because Income-tax and GST are applied in isolation. In many cases, GST exposure alone exceeds the tax optimisation achieved.

Key Structural Gaps

Dimension	Income-tax Act	GST Law	Risk / Consequence
Nature of transfer	Capital asset	Supply of service	GST may apply even if tax-neutral
Slump sale	Recognised	No automatic exemption	Going concern must be proven
Appointed date	Retrospective allowed	Ignored	Interim GST exposure
ITC vs depreciation	Mutually exclusive	Conditional migration	Dual disallowance risk

GST now often drives transaction economics, not just downstream compliance.

Critical Insights for Boards & CFOs

1. Slump Sale (Sections 2(42C) & 50B)

   • Must transfer entire undertaking as functional business

   • Lump-sum consideration, no asset allocation

   • Form 3CEA certification mandatory

   • Misallocation post-deal destroys slump-sale character

2. Tax-Neutral Reorganisations (Section 47)

   Transaction	Condition	GST Implication
   Amalgamation	75% shareholder continuity	ITC transferable
   Demerger	Proportional transfer	Rule 41 apportionment
   Firm → Company	All assets & liabilities	Going concern
   Company → LLP	100% partner continuity	Credit preserved

3. ITC vs Depreciation

   • Election is one-time, irreversible: ITC migration or capitalisation

   • Post-Alstom (Guj. HC, Jan 2026): 100% ITC must migrate, partial retention impermissible

4. Interim Period & Litigation Risk

   • Appointed date → NCLT/court order: distinct taxable persons

   • Risks: GST on inter-entity supplies, no ITC cross-utilisation, separate returns

5. Inter-State Mergers

   • IGST/CGST transferable; SGST is state-locked → permanent credit loss

   • Must plan deal economics upfront

6. Buyback & Redemption in Startups

   • Legitimate: shareholder exits, capital rebalancing, preference simplification

   • Misuse triggers: funded via share premium/fresh issue, disguised exits

   • Tax consequence: dividend treatment, denial of capital loss, GST risk if linked to slump sale or going concern

Key Recommendations (Budget 2026)

• Fast-track demerger neutrality – RD route aligned with NCLT

• OFS holding period rationalisation – Reduce to 1 year

• Cross-sector loss transition – Continuity + anti-abuse safeguards

• Slump sale holding period – Align to 24 months

• Buyback rationalisation – Exclude premium/issue proceeds, allow cost set-off

Five Outcomes of a Successful Transfer

1. Income-tax neutrality / concessional taxation

2. GST exemption as a going concern

3. Full ITC preservation

4. Zero penalty exposure

5. Immunity from proceedings against dissolved entities

Anything less is deferred litigation.

Closing Thought:
In India’s enforcement environment, execution discipline matters more than intent. The most effective restructuring strategies anticipate audit, align statutes, preserve credit, and withstand scrutiny — delivering long-term, risk-proof shareholder value.

Taxation of Business Transfers in India - Income-tax & GST Framework for Structuring, Compliance and Litigation Immunity

 By CA Surekha S Ahuja

Introduction: Why “Compliant” Business Transfers Still Fail

In Indian tax practice, business transfers rarely fail due to ignorance of law.
They fail because the law is applied in fragments.

A transaction may be flawlessly executed under the Income-tax Act, 1961, yet unravel entirely under the Goods and Services Tax law, resulting in substantial demands, interest and penalties. In several recent restructurings, GST exposure has exceeded the income-tax cost that the transaction sought to optimise.

The core issue is structural:

Income-tax and GST do not conceptualise business transfers in the same manner.

This article presents a single, integrated framework to ensure that business transfers are not only tax-efficient, but also GST-neutral, credit-preserving, audit-defensible, and litigation-resistant.

The Structural Disconnect Between Income-tax and GST

At the heart of most disputes lies a fundamental divergence in statutory design.

Dimension	Income-tax Act	GST Law	Practical Consequence
Nature of transfer	Capital asset	Supply of service	GST may apply even where income-tax is neutral
Slump sale	Expressly recognised	No automatic exemption	Going concern must be independently established
Appointed date	Retrospective effect allowed	Ignored until order date	Interim GST exposure
Asset abstraction	Permitted	Deemed supply risk	18% GST on open market value
ITC vs depreciation	Mutually exclusive	Conditional migration	Dual disallowance risk

The modern reality is that GST now determines transaction economics, not merely downstream compliance.

Income-tax Treatment: Precision Over Form

Slump Sale – Sections 2(42C) and 50B

A transfer qualifies as a slump sale only where all statutory conditions are met cumulatively:

• Transfer of the entire undertaking as a functional business

• Lump-sum consideration

• No assignment of individual asset values

• Certification in Form 3CEA

Tax outcome

• Capital gains taxable under Section 50B

• Net worth deemed as cost

• No indexation benefit

Any post-transaction allocation of consideration — even for accounting convenience — has repeatedly been held to destroy the character of a slump sale.

Tax-Neutral Reorganisations – Section 47

Income-tax neutrality under Section 47 is strictly conditional.

Transaction	Section	Core Statutory Conditions
Amalgamation	47(vi)	75% shareholder continuity
Demerger	47(vib)	Proportionate transfer of undertaking
Firm → Company	47(xiii)	Transfer of all assets and liabilities
Company → LLP	47(xiiib)	100% partner continuity

Critical principle:
Compliance with Section 47 enables GST planning — it does not eliminate GST obligations.

GST Law: The Controlling Discipline

Going Concern Exemption – The Decisive Test

Under GST, exemption is available only for “transfer of a going concern” under Notification No. 12/2017-CT (Rate).

In practice, tax authorities and auditors examine the transaction through a cumulative, substance-based lens, focusing on the following seven factors:

1. Independent operational viability

2. Transfer of all operating assets

3. Explicit assumption of identifiable liabilities

4. Employee continuity

5. Novation or continuity of contracts

6. Absence of material operational disruption

7. Clear documentary intent to transfer a going concern

Failure on any one parameter converts the transaction into a taxable supply of assets.

The Deemed Supply Trap

Where a taxable person ceases business without a going concern transfer, GST law deems all business assets — including stock, capital goods and plant — to be supplied at open market value.

This provision has emerged as the single most expensive error in poorly structured reorganisations, frequently resulting in GST demands that exceed the income-tax cost of the transaction itself.

Aligning Both Laws: An Integrated Framework

Transaction	Income-tax Position	GST Requirement	Net Result
Slump sale	Section 50B	Going concern compliance	GST exempt
Merger	Section 47(vi)	ITC transfer u/s 18(3)	Credit preserved
Demerger	Section 47(vib)	Rule 41 apportionment	Proportionate ITC
Firm → Company	Section 47(xiii)	Going concern transfer	Tax neutral
Business closure	Capital gains	Going concern restructuring	Deemed supply avoided

In several cases, GST going-concern structuring delivers greater economic value than income-tax optimisation.

ITC vs Depreciation: A One-Time Election

The law draws a clear line:

• Income-tax: Depreciation is disallowed where ITC is availed

• GST: ITC transfer is permitted only where liabilities are transferred

Businesses must therefore make a single, irreversible election at the structuring stage:

Election	Consequence
ITC migration	Full credit available to transferee
Capitalisation	Depreciation benefit only

Post-transaction reversals are rarely defensible in audit or appellate proceedings.

Post-Alstom: ITC Transfer Is Absolute

Following Alstom Transport (Gujarat High Court, January 2026), the legal position has attained clarity:

• 100% ITC must migrate on transfer of business

• Partial retention or bifurcation is impermissible

• Dissolved entities have no refund entitlement

• Continuation of GST registration post-merger is procedural, not substantive

This judgment has decisively reshaped GST restructuring jurisprudence.

The Interim Period: The Most Litigated Phase

Between the appointed date and the court or NCLT order date, transferor and transferee remain distinct taxable persons.

Consequences are unavoidable:

• GST on inter-entity supplies

• Separate returns and ledgers

• No cross-utilisation of ITC

Ignoring this period has become the primary source of merger-related GST litigation.

Inter-State Reorganisations: The SGST Constraint

While IGST and CGST credits are transferable, SGST remains State-locked.

In inter-State mergers, SGST credit is permanently lost, directly impacting transaction valuation. This is not a compliance issue — it is a deal economics constraint that must be addressed upfront.

Proceedings Against Non-Existent Entities

Courts have consistently held that:

• proceedings against dissolved entities are void, and

• liabilities survive and attach to the transferee.

Immediate substitution and intimation are essential to preserve limitation and prevent parallel proceedings.

Conclusion: What Defines a Successful Business Transfer

A business transfer can be regarded as successfully structured only when all five outcomes are achieved simultaneously:

1. Income-tax neutrality or concessional taxation

2. GST exemption as a going concern

3. Full preservation of input tax credit

4. Zero exposure to penalty

5. Immunity from proceedings against non-existent entities

Anything less is not tax planning.
It is deferred litigation.

Closing Reflection

In today’s enforcement environment, business transfers are judged not by intent, but by execution discipline.
The most effective tax structures are those that anticipate audit, withstand scrutiny, and align both statutes from inception.

Section 194C vs Section 194J: The Ultimate Guidance Note on TDS Classification

By CA Surekha S Ahuja

Introduction

Classifying TDS correctly between Section 194C and Section 194J is one of the most frequent and consequential issues in TDS compliance. The difference is not just academic — it affects deductibility, expense acceptance, interest exposure, penalties, and appellate risk.

Misclassification commonly arises in payments for execution-oriented contracts, creative and digital services, IT services, maintenance agreements, and professional / advisory engagements. Assessing Officers, audit teams, and tribunals repeatedly emphasise that labels on invoices or contracts do not determine the law — substance and dominant purpose do.

This definitive guidance note consolidates law, statutory sub-section distinctions, thresholds, judicial tests, risk indicators, grey areas, compliance safeguards, and practical classification logic. It is meant for professionals, compliance teams, and clients to deduct the right TDS — sustainably and defensibly.

Statutory Framework & Section-Level Distinctions

Section 194C — Payments for Carrying Out Any Work

Section 194C applies to sums paid to a resident for carrying out any work (including supply of labour) in pursuance of a contract.

• Sub-section (1): Governs deduction by the payer from payments to a contractor.

• Sub-section (2): Extends the requirement to deduction by a contractor from payments to a sub-contractor.

• Explanation: Expands “work” to include activities like advertising, broadcasting, transport, catering, and manufacturing under supply contracts.

Section 194C is execution-oriented: the payer engages someone to accomplish a job and deliver output.

Section 194J — Fees for Professional or Technical Services

Section 194J applies to payments for:

• Professional services (sub-section (1)(a)), and

• Technical services (sub-section (1)(b)),
  along with royalty, non-compete fees, and certain director remunerations.

Key internal sub-section points:

• Explanation (a): Defines “professional services” using a restrictive list — legal, medical, engineering/architectural, accountancy, and similar notified professions. Photography, videography, or creative execution is not included.

• Explanation (b): Defines “technical services” as managerial, technical, or consultancy services, excluding simple execution contracts.

Section 194J is intellect-oriented: it applies where service delivery involves independent application of specialised knowledge, professional judgment, or advisory functions.

Thresholds, Rates & Trigger Points (FY 2025–26)

Section	Single Trigger	Aggregate Trigger	TDS Rate
194C	₹30,000	₹1,00,000/year	1% (individual/HUF) / 2% (others)
194J	₹30,000	₹30,000/year	10% (professional) / 2% (technical)

Once the relevant threshold is crossed, TDS must be deducted on the entire amount, not merely the excess.

The Core Legal Test — Dominant Nature & Substance

Courts and tribunals uniformly apply the dominant purpose test. Neither the title of a contract nor the terminology on invoices determines the applicable section. The guiding questions are:

1. Is the engagement primarily execution of work or primarily advisory/consultancy?

2. Is the responsibility output-oriented or discretion/judgment-oriented?

3. Does the service require independent application of specialised knowledge?

• If execution of work dominates, then Section 194C applies.

• If professional or technical judgment dominates, then Section 194J applies.

Skill or artistry alone does not elevate a contract to professional service.

When Section 194C Applies

Section 194C captures contractual work even if skill or technical ability is involved, provided the engagement is execution-driven.

Common classifications under Section 194C include:

• Event photography or videography

• Product catalogue shoots

• Corporate video production

• Advertising production and shoot execution

• Editing, retouching, post-production as part of the shoot agreement

• Fabrication, installation, routine maintenance contracts

• Transport, logistics, catering, housekeeping, security services

• Manpower supply and routine IT support/implementation

Judicial support:
In EMC v. ITO (ITAT Mumbai), payments to photographers and artists were held to be under Section 194C. The Tribunal emphasised that photography is not a notified profession and that skill alone does not transform execution into professional consultancy.

When Section 194J Applies

Section 194J applies in limited and clearly demonstrable situations involving:

• Advisory or professional judgment: legal, audit, valuation, certification, strategic consultancy

• Technical services: architectural design, management consulting, specialised IT architecture

• Professional experts engaged independently of execution (e.g., legal opinions, technical system designs)

• Notified film artists in cinematographic production

The dominant element must be intellectual or professional expertise, not mere delivery of an output.

Grey Areas & Overlap Situations

Real-world contracts often combine execution and advisory elements. In such cases the dominant nature must be established factually:

• Maintenance contracts: Routine servicing → Section 194C; Expert diagnostics → Section 194J

• Advertising: Shoot execution → Section 194C; Brand strategy/creative consultancy → Section 194J

• IT services: Implementation/support → Section 194C; System design/architecture → Section 194J

Artificial invoice splitting or naming conventions without contractual clarity will not persuade authorities.

Risk-Flag Checklist for Correct Classification

These indicators often trigger adverse findings and should prompt careful review before TDS deduction:

• Use of words like consultancy, advisory, professional without defined scope

• Absence of specific deliverables or timelines

• Responsibility extending beyond execution to design/strategy

• Independent discretion exercised by vendor, not client-directed execution

• Composite contracts without clear segregation of consulting vs execution elements

• Change in scope without re-review of TDS treatment

• Historical practice followed without re-classifying changed deliverables

• Deduction under a higher rate assuming it cures default

Presence of multiple risk flags generally suggests a default under Section 194J.

Common Compliance Errors

The most common mistakes are:

• Deducting under Section 194C solely because a contract exists

• Deducting under Section 194J due to “professional” terminology

• Assuming higher deduction under the wrong section neutralises default risk

Judicial precedents firmly establish that deduction under an incorrect section constitutes a default, regardless of the rate applied.

Compliance Safeguards & Best Practices

To ensure defensible TDS compliance:

• Draft contracts clearly: Define scope, deliverables, and responsibility

• Identify dominant nature: Execution vs advisory should be explicit

• Document reasoning: Maintain internal notes on section selection

• Segregate services: Separate execution from advisory components financially and contractually

• Annual review: Reassess recurring contracts for any scope changes

• Retain judicial references: Especially EMC v. ITO for creative/photography classifications

A well-reasoned and documented approach is the strongest defence in scrutiny and appellate proceedings.

Conclusion

Determining whether Section 194C or Section 194J applies is not a mechanical label exercise but a legal characterisation based on substance and dominant purpose. Courts and tribunals prioritise function over form.

• Execution-oriented work — clearly Section 194C

• Professional or technical advisory services — clearly Section 194J

Correct TDS classification today is the most effective strategy against tomorrow’s assessments, audits, and disputes. A contract-backed, function-driven, and judicially aligned approach ensures compliance certainty and long-term defensibility.

Resident Directors and Professional Fees from Foreign Companies: A 360° Analytical Guide

 By CA Surekha S Ahuja

"Global income is taxable, but structured compliance transforms complexity into efficiency — every foreign fee has its pathway and precautions."

Introduction

Resident directors of Indian companies or professionals may also provide services to foreign entities, ranging from consultancy and advisory to board-level decision-making. While globally lucrative, such payments trigger Indian tax, FEMA, and DTAA obligations.

Key challenges include:

• Tax classification: Distinguishing director fees vs professional consultancy

• Foreign Tax Credit (FTC) under DTAA or Section 91

• FEMA and remittance compliance for inward and outward payments

• Schedule FA disclosure to avoid penalties

• TDS compliance on cross-border payments

This article provides a comprehensive, analytical, 360° guide on handling such foreign payments for resident directors, with all ifs, buts, and triggers, ensuring fully defensible tax planning.

Taxation of Fees from Foreign Companies

Income Classification

Nature of Payment	Income Head (Resident)	Notes / Analysis
Director Fees / Sitting Fees	PGBP (Profits & Gains from Business or Profession)	Active service rendered; treated as business income. 44ADA not generally allowed unless services are purely professional, not governance
Professional Consultancy Fees	PGBP	Separate from director role; must be supported by clear contracts
Commission linked to profits of foreign company	PGBP / Salary	Fact-based; if director is employed, may attract salary classification in India

Insight: Indian tax authorities analyze substance over form. A foreign “consultancy fee” can be treated as director remuneration if role overlaps with management.

TDS Considerations

• Foreign payer: Indian TDS under Section 195 applies only if payment is routed via India.

• Foreign-sourced fees received directly abroad: No Indian TDS, but income must be reported in ITR-3 under PGBP, along with Schedule FA for foreign assets and income.

Key Trigger:

Misreporting foreign director fees can invoke Section 271FA penalty of ₹10 lakh per omission.

DTAA and Foreign Tax Credit (FTC)

Resident directors can claim FTC for taxes withheld abroad, reducing double taxation.

Parameter	Detail	Practical Insight
Applicable Law	DTAA (specific country) or Section 91	FTC is capped at Indian tax on that income
TDS Rate	Country-specific (5-30%)	Reduced by treaty rate; claimable via Form 67
Documentation	TRC (Tax Residency Certificate) + Form 10F	Mandatory to claim DTAA benefits; apostille recommended if foreign authority requires

Analytical Note: Indian courts consistently uphold FTC claims only if TRC and Form 10F are provided. Absence of documentation → 20-40% statutory TDS risk.

FEMA & Remittance Compliance

Payments from foreign companies involve foreign exchange rules, including Form 15CA/15CB for remittances exceeding ₹5 lakh:

Document	Purpose	Responsibility
Form 10F	DTAA residency proof	Director / Service provider
TRC	Treaty benefits	Foreign tax authority
Form 15CB	CA certification of taxability	Indian payer
Form 15CA (Part C)	Remittance declaration	Indian payer
Service Contract	Proof of consultancy / director service	Both parties
BO Declaration	Prevent conduit claims	Service provider
Bank Details	Facilitate net remittance	Foreign entity

Insight: Proper compliance ensures DTAA rate TDS deduction, avoids statutory 20-40% TDS, and guarantees credit in India.

Structuring Professional Fees vs Director Fees

Pure Professional Fees

• Eligibility: Specified professions under 44AA(h) – CA, CS, lawyer, doctor, technical consultancy.

• Presumptive Scheme: 44ADA – 50% deemed profit; effective tax 15–20% after FTC/TDS.

• Safeguard: Avoid referencing directorship in invoices, contracts, or communications.

 Director Fees from Foreign Company

• Classified under PGBP.

• No 44ADA presumptive benefit, unless role is fully independent and not governance-linked.

• TDS: If remittance is routed via India, Section 195 applies.

• Schedule FA disclosure: Mandatory; omission penalized under 271FA.

Professional Insight: Structuring consultancy outside of director role can optimize tax to 15–20%, compared with 30%+ if incorrectly classified.

Triggers and Caution Points (All “Ifs & Buts”)

Trigger / Scenario	Section / Law	Consequence	Mitigation / Best Practice
Director role referenced in invoice	194J(1)(ba) / PGBP	Disallowance, audit query	Separate consultancy agreement; avoid board references
Payment routed via India, no 195 compliance	195	Statutory TDS 20-40%	Form 15CA + 15CB compliance
Missing TRC/Form 10F	DTAA claim	FTC denied, higher effective tax	Obtain upfront, apostilled if required
Foreign service rendered in India >60 days	PE risk u/s 9(1)(i), Art 5 DTAA	Income may be taxable as branch profit	Keep services outside India
Mixed professional + governance service	28(va) vs 194J(1)(ba) conflict	Audit addition, TDS dispute	Clearly segregate roles
FA omission	271FA	₹10 lakh penalty	Mandatory annual Schedule FA disclosure

Insight: The risk matrix is amplified if multiple triggers coincide. Professional structuring mitigates CASS risk, audit scrutiny, and excessive tax exposure.

Analytical Tax Comparison

Scenario	Effective Rate	Key Observations
Pure Professional Fee (foreign client) – 44ADA	~15–20%	Post-FTC and 50% presumptive profit; safe if role segregated
Director Fee (foreign company)	~30%	Full slab; no presumptive scheme; FA disclosure mandatory
Mixed Director + Professional	25–35%	Risk of disallowance and TDS disputes; high audit scrutiny

Takeaway: Proper classification drives optimal tax planning, leveraging DTAA and 44ADA only where legally defensible.

Optimized Workflow for Resident Directors

1. CLASSIFY services: Director vs professional consultancy.

2. STRUCTURE invoices via LLP/firm for consultancy (not personal name).

3. CAP receipts: ₹75L per annum for 44ADA; quarterly invoices recommended.

4. DOCUMENT upfront: TRC + Form 10F for foreign clients.

5. ENSURE digital remittance: Bank trail for audit-proofing.

6. FILING: ITR-3 + Schedule BP, FSI, FA; Form 67 for FTC claim.

7. RECORD retention: Minimum 7 years; contracts, bank statements, TRC, 15CB/CA certifications.

Professional Insight: Workflow ensures DTAA-safe remittance, audit-proof classification, and minimal effective tax.

Strategic Recommendations

• Segregate roles: Consultancy should not overlap with directorship.

• Domestic clients: Simplifies TDS and compliance.

• Foreign clients: Proceed only if DTAA savings ≥5%.

• High-volume foreign work: Use LLP/firm structure; cap receipts per presumptive thresholds.

• Documentation is king: Missing TRC or Form 10F undermines FTC.

Ultimate Professional Insight: With structured planning, foreign professional fees can yield an effective tax of 15–20%, vs 30–35% on misclassified director fees, while remaining fully compliant under Income Tax Act, 195, 44ADA, FEMA, and DTAA.

Closure — Professional Analytical Saying

“Global engagement rewards, but compliance protects — classify, document, and segregate. Every rupee earned abroad is legitimate only when law, form, and substance align.”

Resident Directors and Professional Fees from Indian Companies: A 360° Analytical Guide

 By CA Surekha S Ahuja

"Governance is power, and with power comes scrutiny — understanding tax, compliance, and thresholds is not optional; it is mandatory."

Introduction

Resident directors of Indian companies often straddle multiple roles: strategic decision-makers, fiduciaries, and sometimes, providers of specialized professional services. Payments received — whether as sitting fees, commission, or consultancy — are legally and tax-wise complex, governed by multiple overlapping provisions. Misclassification can trigger TDS disputes, additions in assessment, penalties, and litigation.

This article provides a 360-degree, authoritative analysis of professional fees for resident directors from Indian companies, covering:

• Tax classification & heads of income

• TDS provisions and thresholds

• Presumptive taxation possibilities and pitfalls

• Critical triggers and caution points

• Structuring safeguards for compliance

It is designed as a reference-grade, professional advisory note, unmatched in detail and clarity.

Legal and Tax Position of a Director

A director is not a regular employee. Their statutory recognition under the Companies Act, 2013 brings unique tax and compliance implications.

Types of Directors:

Type	Key Attributes	Tax Implication
Executive	Involved in day-to-day management	May attract salary u/s 17
Non-executive	Strategic input only, no salary	Sitting fees, commission — PGBP (if independent consultancy) or 194J(1)(ba) fees
Independent	Governance, oversight	Sitting fees — PGBP / 194J(1)(ba)

Insight: The substance of the role, not the title, determines taxability. Courts routinely examine authority, decision-making, and control.

Classification of Income

Resident directors may receive payments in several forms:

Payment Type	Income Head	Notes
Fixed remuneration / salary	Salary (s.17)	Deductible under s.192; subject to slab
Sitting fees / Board fees	PGBP / 194J(1)(ba)	10% TDS > ₹50,000 per FY
Consultancy or professional services	PGBP	Must be clearly separated from director role; 194J(1)(a) applies
Commission on profits	Salary or PGBP	Fact-based; often salary if linked to company profits

Professional Insight: Labeling a director’s payment as “consultancy fees” does not automatically override director-specific provisions.

TDS Triggers and Compliance

Domestic Companies

Section	Applicability	Rate / Threshold
192	Director receiving salary	Slab rates
194J(1)(ba)	Any fee for director services except salary	10% TDS > ₹50,000 per FY
194H	Never	—

Key Points:

• 194J(1)(ba) prevails over 194J(1)(a).

• Non-compliance → disallowance and interest (234A/B/C).

• TDS deduction ensures clean credit for director in Form 26AS.

Presumptive Taxation

• 44ADA: Generally not available for directors, as the role is governance-linked.

• 44AD: Rarely applicable if the service is purely commercial, with no management authority.

Taxmann-grade Insight: Attempting 44ADA on director fees is a red flag for scrutiny.

Documentation & Structuring Safeguards

Critical to avoid reclassification:

1. Separate director appointment letter vs consultancy agreement.

2. Avoid director references in invoices claiming consultancy.

3. Board resolutions should reflect actual services provided.

4. Maintain clean quarterly invoicing.

Universal Documentation Checklist:

Document	Purpose	Responsibility
Board Resolution	Record fees & role	Company
Invoice	Proof of consultancy fees	Director / Consultant
Agreement	Separate consultancy	Both parties

Analytical Insight: Proper separation reduces audit risk, prevents TDS misclassification, and ensures eligibility for any permissible presumptive scheme.

Triggers and Caution Points (CASS Reality)

Trigger	Consequence	Mitigation
Director fee claimed as 44ADA	Disallowance, penalties	Avoid 44ADA for director remuneration
No TDS under 194J(1)(ba)	Disallowance	Ensure TDS > ₹50,000 is deducted
Mixed services (director + consultancy)	Audit & reassessment	Separate agreements clearly
Cash receipts / FA omissions	Penalties u/s 271	Maintain 100% bank transfers and records

Analytical Summary — Why This Matters

Resident directors are heavily scrutinized:

• Misclassification → 10-30% tax and penalties

• Incorrect 44ADA → addition in assessment

• Board governance vs consultancy → critical distinction

Practical Takeaway: Even high-expertise professionals like CAs, lawyers, and technical consultants cannot safely claim presumptive benefits on director fees unless role and documentation are segregated.

Closure — Professional Insight

“Director remuneration is governance, not consultancy; clarity, documentation, and compliance are your shields against scrutiny.”

A well-documented, legally aligned fee structure ensures:

• Proper TDS deduction

• Audit-proof treatment

• Safe navigation of tax slab, presumptive schemes, and compliance triggers

This 360-degree approach transforms what is typically a risky area into a fully compliant, analytically defensible structure.