Franchising in India has expanded and has witnessed an impressive growth in the recent past. With the booming of the Indian economy and liberal Government policies, India offers numerous opportunities in the field of franchising which attracts both foreign and domestic investors. The franchising business opportunity in India has emerged as a profitable option for both the franchisors and franchisees.

Since no specific law governs franchising in India, different laws may govern a franchise agreement.  This could include the Contract Act, 1872, the Foreign Exchange Management Act, 1999, the Trademarks Act, 1999, the Competition Act, 2000, the Income Tax Act, 1961 (“IT Act”) 1961, the Companies Act, 1956 and the relevant guidelines issued by the Reserve Bank of India.

The tax system in India since 1990’s has under gone a radical change, with liberal economic policy and WTO commitments of the country, such as: -        

• Reduction in customs and excise duties
• Lowering corporate Tax
• Widening of the tax base and toning up the tax administration

The structure of franchise arrangement and the existence of agreements between the countries involved may have considerable influence on taxation. India has entered into Double Taxation Avoidance Agreements (DTAA) with 75 countries for providing relief from double taxation. The tax rates in respect of income by way of interest, dividends, royalties and technical fees etc are as determined in the respective DTAAs. Even in cases where there are no agreements for avoidance of double taxation, unilateral relief from double taxation has been made under Section 91 of IT Act.

If a foreign franchisor receives royalties service or franchise fees, tax has to be paid under the IT Act as income ‘arising’ and ‘accruing in India’. In case a foreign franchisor sends 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 amount of tax payable by the franchisor/ franchisee company as assessee, the deductions available in Section 30 to 43D of the IT Act can be important for tax planning purposes relating to:

• Rent, rates, taxes, repairs and insurance in respect to premises used for business.
• Depreciation
• Expenditure on scientific research
• Expenditure of a capital nature on acquisition of patent rights or copyrights

The availability of tax advantages would depend on the type of franchise, the product of the franchise and where the unit is to be physically located. Also if a franchise agreement provides that the franchise shall export or sell to the franchisor, some of the goods produced by it, than taxes will levied on the deemed profits.

Further, Capital Gains Tax may also accrue in a franchise business on account of transfer of a capital asset as any profits and gains arising from the transfer of a capital asset affected in the previous year are chargeable to income tax under section 45 of the Act. It is pertinent to mention that, long-term capital gains are also taxed at concessional rates under Section 112 of IT Act.

The IT Act has also been amended to regulate the scheme of providing Advance rulings to non-resident taxpayers. This has been enacted in the interest for avoiding needless litigation and promoting better taxpayer relations. The AAR has power to determine the tax liability arising out of a transaction that has been undertaken with an Indian resident.

Abenla Aier & Vikrant Singh Jafa
Jafa & Javali
INDIA