GST on intercompany transactions, director salary, and related-party supplies: what a Pvt Ltd must declare

A director's salary of ₹12 lakh triggers GST of ₹2.16 lakh that the company must self-assess under reverse charge — not the director, and not optional. Supplies between related companies are taxable at open market value even where no consideration passes, under Schedule I to the CGST Act 2017. The most common Pvt Ltd error is not the intercompany invoice; it is the shared-service recharge, the free group support, and the director's remuneration that never see a GST entry.

What the law actually requires

Related-party supplies are taxable without consideration. Section 7(2)(a) read with Schedule I, paragraph 1 of the CGST Act 2017 treats "supply of goods or services or both between related persons or between distinct persons, when made in the course or furtherance of business" as supply even without consideration. "Related persons" is defined in the Explanation to s.15(2)(b): it includes common control, 25%-or-more common ownership, employer-employee, family, and — by cross-reference — "associated enterprises" as defined in s.92A of the Income-tax Act 1961. Two group companies sharing an office, a brand, or an IT system are related persons whether or not they invoice each other.

The value is open market value. Where a supply to a related person is not at arm's length, Rule 28 values it at open market value, and where the recipient is eligible for full ITC, the value is the declared value of the transaction. The consequence: a management fee or IT-support recharge below cost is re-priced to open market value on audit.

Director services are reverse charge. Notification 13/2017-CT(Rate) dated 28 June 2017, entry for services supplied by a director of a company to the company, makes GST payable by the recipient company under s.9(3) CGST Act 2017 — the reverse charge mechanism. The company, not the director, must self-assess 18% GST on the director's remuneration. The director does not invoice GST; the company computes it and reports it in GSTR-3B Table 4(B) and GSTR-1 Table 3B(i).

Two exclusions worth knowing. Money (loan principal and interest) is neither goods nor services under s.7(1)(d) read with the schedule, so intercompany loans carry no GST. And salary paid by an employer to an employee is not "supply" under Schedule III, paragraph 1 — but the director's remuneration is caught by the RCM notification precisely because a director is not an employee in the same sense for GST purposes.

What changed FY 2025-26

• RCM on director services is unchanged and enforced. Notification 13/2017-CT still covers director remuneration; no FY 2025-26 notification carved out a fresh exception. The recurring error — treating director salary like employee salary — continues to surface in scrutiny because GSTR-3B Table 4(B) RCM lines are machine-checked.
• Related-party value rules hardened by audit practice. With GSTR-9C Table 12 reconciling intercompany turnover, group recharges at cost are increasingly re-examined against Rule 28 open-market value. A recharge at cost without a documented valuation is the FY 2025-26 audit flag.
• Schedule III / insurance and the related-party lens. Beyond scope here, the Finance Act 2025's changes to Schedule III (taxability of certain insurance and employee-benefit-like supplies) have prompted departments to re-read related-party benefit flows — another reason group companies should formalise every recharge in writing.

Worked example: Riya Pvt Ltd

Riya Pvt Ltd pays its two whole-time directors total remuneration of ₹12,00,000 in FY 2025-26. Under Notification 13/2017-CT, this is a reverse-charge supply:

The cash-flow is neutral where the company is a regular filer with output liability: the ₹2,16,000 of RCM output tax is simultaneously eligible ITC, so the net payment is zero — provided the company actually reflects both legs. The companies that lose are those that book the RCM liability and forget the matching ITC, or book neither.

Separately, Riya provides free accounting services worth ₹6,00,000 a year to its sister company. Under Schedule I, this is a taxable supply between related persons without consideration; Rule 28 values it at open market value (₹6,00,000, the recipient having full ITC). Riya must issue an invoice, declare it in GSTR-1, and pay 18% GST of ₹1,08,000 — the sister company claims the same as ITC. Filing nothing because "no money moved" is the classic Schedule I miss.

Step-by-step: what a Pvt Ltd must do

• List every related person — subsidiaries, parents, sister concerns, and any entity that is an "associated enterprise" under s.92A ITA 1961 (control, common management, common shareholders of 25% or more).
• Map every money-free flow — shared staff, office, software, brand, guarantees — and treat each as a Schedule I supply with a documented value under Rule 28.
• Invoice intercompany services in the month performed at arm's length, not at year-end on a lump-sum basis.
• Add director remuneration to the RCM register. Track the amount credited to each director monthly and compute 18% RCM in the same month.
• Report RCM in both returns — GSTR-3B Table 4(B) and GSTR-1 Table 3B(i) — and claim the matching ITC in Table 4(A) if eligible.
• Recharge shared costs in writing with a one-page TP-supported valuation note, so the Rule 28 position is documented before any audit asks.

FAQ

Is GST payable on salary paid to a director who is also a shareholder?
Yes, if the payment is remuneration or commission for services as a director. Notification 13/2017-CT places the reverse-charge liability on the company for services supplied by a director, regardless of shareholding. Where the director receives only sitting fees for board meetings, the same RCM treatment applies to those fees.

Can the company claim ITC on the RCM GST it pays on director salary?
Yes, where the general conditions of s.16 are met and the director's services are used in the course or furtherance of business. The RCM output tax in Table 4(B) becomes eligible credit in Table 4(A), making the net effect neutral for a regular taxpayer.

We recharge group costs at actual cost. Is that a problem?
Under Rule 28, a supply to a related person is valued at open market value, with a carve-out where the recipient can take full ITC — in which case the declared transaction value can be adopted. Keep a valuation note and a written recharge agreement; an unsupported at-cost recharge is what audits re-price.

Is GST payable when one group company gives another an interest-free loan?
No. Money is excluded from "goods and services" under s.7(1)(d), so the principal and any interest on an intercompany loan do not attract GST. What would be taxable is a fee for arranging the loan or a guarantee service charged separately.

For a related-party GST review before your next return, visit pvtltd.co.

Sources

• s.7(1)(a) and (d), s.7(2)(a), s.9(3) CGST Act 2017
• Schedule I, paragraph 1; Schedule III, paragraph 1 CGST Act 2017
• Explanation to s.15(2)(b) CGST Act 2017 (related persons, including s.92A ITA 1961 associated enterprises)
• CGST Rule 28 (open market value)
• Notification 13/2017-CT(Rate) dated 28 June 2017 (director services under RCM)

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