taxation 2019-08-06

Taxation Rules in India for International Franchise Expansion

Normally the relationship between the franchisor and franchise is of an Independent contractor. However, when culling out the terms of franchisee relationship, the taxation effect cannot be undermined.

By Features Writer
Taxation Rules in India for International Franchise Expansion

Considering the growing demand in the country we have seen a lot of companies entering India under the franchisee model. When international brands expand into through the franchising arrangements it is very imperative to determine the relationship anticipated between franchisor and franchisee before the formal agreements can be executed. Though unlike US, India does not have any formal franchising law and the relationship is ideally driven by the Franchisee agreement and the contract law. Under the franchising agreement, the franchisor (usually an established brand) gives to franchisee, for a certain fee-franchise fee or royality, the rights to sell or manufacture goods or provide certain services under its brand name. The Companies may enter India under the model of direct franchising, master franchising, regional franchising or local incorporation. Normally the relationship between the franchisor and franchise is of an Independent contractor. However, when culling out the terms of franchisee relationship, the taxation effect cannot be undermined.

Ideally the direct taxation of the franchisee arrangement is governed by Income Tax Act, 1961. The franchisee(s) often makes the payment in the form of royalty or the franchisee fees to the franchisor and is required to deduct a withholding tax of 10% on the payments so made. However, in case the franchisor (nonresident) is entitled to obtain the benefits of the double tax agreement signed by India, then he can claim the benefit of the more beneficial tax provisions.

Further in a case where the franchisor (being a foreign party) sends certain technicians and supervisors to India, the salaries payable to these persons would be subject to personal income tax, whether an arrangement is made to deduct the tax at source or they are taxed as self-employed persons if they come as consultants. 

The drafting of Franchisee agreement should be done very carefully as the same, if results in the creation of permanent establishment in India, then the Companies may be subject to additional taxation burden and the amounts will be charged as business income.

The permanent establishment of the franchisor can take the form of Agency PE (when the Franchisee acts as an agent of the Franchisor and can conclude contracts on its behalf);Fixed place of business PE(when the business of franchisor is carried through a fix establishment in India).

From the indirect tax side, the Indian franchise need to pay GST under reverse charge as import of service on amount paid to non-resident franchisor. However, if the franchisor is resident or where the non-resident franchisor maintains fixed establishment in India, the franchisor need to charge GST on amount charged from franchisee.

In a nut shell it can be reasonably assumed that the franchising model play a very important role in the country however, the arrangement has to be very carefully prepared considering the taxation and applicable DTAA.

 

This Article is Authored By Mr. Sameer Mittal, Managing Partner, Sameer Mittal & Associates LLP and Chairman, International Trade Council in India

Comment
image
image
mobile
address
star franchise india
Related opportunities
  • Clinics & Nursing Homes
    Dr. Harish Kumar is a Trustee and the Tech. Director..
    Locations looking for expansion Haryana
    Establishment year 2016
    Franchising Launch Date 2021
    Investment size Rs. 50000 - 2lac
    Space required 40
    Franchise Outlets -NA-
    Franchise Type Unit
    Headquater Faridabad Haryana
  • WE ARE ONLY LOOKING FOR INVESTORS HAVING THEIR OWN SPACE..
    Locations looking for expansion Maharashtra
    Establishment year 1991
    Franchising Launch Date 2016
    Investment size Rs. 10lac - 20lac
    Space required 400
    Franchise Outlets -NA-
    Franchise Type Unit
    Headquater Mumbai Maharashtra
  • Courier & Delivery
    About Us: InXpress has its origins in the world's largest business..
    Locations looking for expansion Maharashtra
    Establishment year 2011
    Franchising Launch Date 2013
    Investment size Rs. 5lac - 10lac
    Space required 00
    Franchise Outlets -NA-
    Franchise Type Unit
    Headquater Mumbai Maharashtra
  • Casual Dine Restaurants
    About Us: Mamu’s Infusion is a highly-popular and renowned fine dine..
    Locations looking for expansion Rajasthan
    Establishment year 1990
    Franchising Launch Date 2017
    Investment size Rs. 50lac - 1 Cr.
    Space required 150
    Franchise Outlets -NA-
    Franchise Type Unit
    Headquater Jaipur Rajasthan
Insta-Subscribe to
The Franchising World
Magazine
tfw-80x109
For hassle free instant subscription, just give your number and email id and our customer care agent will get in touch with you
email
mobile
OR Click here to Subscribe Online
Daily Updates
Submit your email address to receive the latest updates on news & host of opportunities
More Stories

Free Advice - Ask Our Experts

pincode
;
ads ads ads ads