Introduction
Franchising is a popular business model in India. Franchisees pay initial franchise fees and ongoing royalty payments to franchisors for the right to use the brand, systems, and support. The question arises: How are franchise fees and royalty payments taxed under GST?
The answer is that franchise fees and royalty payments are treated as a supply of services and attract 18% GST in most cases.
This guide explains the legal framework, the GST rates, and the compliance obligations.
Legal Framework: GST on Franchise Services
Franchise Fees as Supply of Services
Franchise fees, royalty payments, advertising contributions, and technical support charges are treated as a supply of services under GST. These are typically taxed at 18%.
SAC Codes
Franchise services are classified under SAC 997331 (licensing services for the right to use trademarks and franchises).
GST Rate for Pure Brand Licensing
Where the franchise arrangement involves only the licensing of a brand or trademark (right to use the name only), the GST rate may be 12%.
ITC Eligibility for Franchisees
Business Use
Franchisees can claim ITC on the GST charged on franchise fees and royalty payments, subject to the conditions under Section 16.
Documentation
The franchisor must issue a tax invoice with GSTIN for ITC claims.
Common Franchise Charges and GST Treatment
| Charge | GST Rate | ITC Eligible |
|---|---|---|
| Initial franchise fee | 18% | Yes |
| Ongoing royalty | 18% | Yes |
| Advertising contribution | 18% | Yes |
| Technical support | 18% | Yes |
| Pure brand licensing | 12% | Yes |
Documentation Required
- Franchise Agreement: Documentation of the franchise terms.
- Tax Invoice: From the franchisor with the franchisee's GSTIN.
- Payment Records: Proof of payment.
Best Practices
- Obtain Proper Invoices: Ensure the franchisor issues a tax invoice with GSTIN.
- Claim ITC: Claim ITC on franchise fees and royalty.
- Reconcile GSTR-2B: Reconcile invoices with GSTR-2B.
- Maintain Records: Maintain all franchise-related documents.
- Seek Professional Assistance: For complex franchise arrangements.
Conclusion
Franchise fees and royalty payments attract 18% GST. Franchisees can claim ITC on these charges. Proper documentation is essential to secure ITC.
Operating a franchise? Anuj Desai & Associates provides expert guidance on GST compliance and ITC. Contact us today.
Contact us:
- Email: office@anujdesaiassociates.com
- Phone: 9619456656
- Website: https://anujdesaiassociates.com
- LinkedIn: linkedin.com/in/ca-anuj-desai-122547230