Franchising is a popular business model in India, wherein a franchisor grants a franchisee the right to operate a business. Franchising offers a low-risk way for entrepreneurs to enter the market, as they benefit from an established brand, business model, and support from the franchisor. However, franchising in India has certain legal obligations, particularly regarding taxation and legal compliance.

 Taxation in Franchising

Franchisors operating in India are subject to various taxes, including income tax and goods and services tax (GST). Income tax is payable on the income earned by the franchisor from its operations in India. Service tax was previously applicable on franchising fees paid by the franchisee to the franchisor. However, service tax has been subsumed into the GST regime, which now governs taxation on franchising in India.

Under the GST regime, franchisors must register for GST and charge GST on the franchising fees paid by the franchisee. The applicable rate of GST depends on the nature of the franchise agreement and the services provided by the franchisor. For example, if the franchisor provides training and support services to the franchisee, GST is payable at 18%. If the franchisor only grants the right to use its brand, GST is payable at 12%.

The GST regime also requires franchisors to file regular returns and maintain proper records of their transactions. Failure to comply with these requirements can lead to penalties and fines.

 Legal Compliance in Franchising

Franchising in India is governed by various laws and regulations, including the Indian Contract Act of 1872, the Competition Act of 2002, and the Foreign Exchange Management Act of 1999.

Under the Indian Contract Act, both parties must sign a franchise agreement in writing. The agreement must include details of the franchisor’s intellectual property rights, the obligations and responsibilities of the parties, the payment structure, and the contract duration.

The Competition Act regulates anti-competitive practices, such as price-fixing and exclusive supply agreements. Franchise agreements that restrict the franchisee’s ability to operate in a particular territory or compete with other franchisees can be deemed anti-competitive and violate the Competition Act.

The Foreign Exchange Management Act regulates foreign investment in India. Franchisors must ensure compliance with the act if they receive payments from foreign franchisees or invest in India through a foreign entity.

Franchisors must also comply with the labour laws in India. The franchise agreement must specify the franchisee’s obligations concerning employment and compliance with the labour laws. Franchisors must ensure their franchisees comply with minimum wage requirements, working conditions, and other labour law requirements.

Franchising is a popular business model in India, but it comes with various legal obligations regarding taxation and legal compliance. Failure to comply with these obligations can result in penalties and fines. Franchisors must seek professional legal and tax advice to ensure compliance with these obligations and to mitigate risks associated with franchising.