How to start a franchise business in India: registrations, agreements and tax

Structures for franchisors and franchisees

Franchisors are usually private limited companies that own the brand and systems. Franchisees can be proprietors, partnerships, LLPs or companies; multi-unit franchisees prefer companies for limited liability and easier financing. Master franchisees covering a region often use a company with its own sub-franchising rights.

Foreign brands entering India may franchise directly, set up a subsidiary to act as master franchisor, or appoint an Indian master franchisee. Each route has different tax and FEMA consequences.

Registrations on each side

The franchisor protects the brand and system, while the franchisee holds the operating licences for each outlet. The table shows the typical split between the two parties.

What the franchise agreement should cover

Because no statute sets franchise terms, the agreement does all the work. Cover the territory and exclusivity, initial fee, royalty and marketing contributions, term and renewal, training and support, supply obligations, quality standards and audits, intellectual property use, confidentiality, non-compete within legal limits, termination triggers and post-termination obligations such as de-branding.

Many franchisors also provide a disclosure document to prospective franchisees covering financials, existing outlets and litigation. It is not mandated by statute but reduces later disputes and misrepresentation claims under contract and consumer law.

GST and tax on franchise payments

Franchise fees and royalties are payments for the use of a brand and business system, taxed at 18% GST. The franchisee can usually claim input tax credit on them if its own outputs are taxable with credit; a restaurant franchisee paying 5% without credit cannot, which makes royalty GST a real cost.

Where the franchisor is overseas, the franchisee pays IGST on royalties under reverse charge as import of services. It must also withhold income tax at the rate under domestic law or the applicable tax treaty, and remit through an authorised bank. Royalty payments are current account transactions under FEMA.

Ongoing compliance

Franchisors should monitor trademark use, renew registrations, and audit franchisees for quality and licence compliance, since a franchisee's food safety or labour violation can damage the whole brand. Franchisees must renew their own licences, file GST returns and pay royalty on time.

Both parties should check competition law when setting resale prices or exclusive supply arrangements, since restrictive terms can raise concerns under the Competition Act 2002.

Evaluating a franchise as a franchisee

Before signing, ask for the franchisor's trademark registration certificates, details of existing outlets you can visit, a realistic investment and payback estimate, and the full list of fees including marketing funds, technology charges and mandatory purchases. Check whether supply must come only from the franchisor and at what margins.

Look at the exit terms closely: lock-in periods, transfer rights if you sell the outlet, non-compete restrictions after exit and who owns the customer data. Independent legal review of the agreement before payment of the initial fee is money well spent.

Pitfalls in franchising

Most franchise disputes arise at renewal or termination, so negotiate those clauses carefully at the outset rather than treating them as standard boilerplate text copied from another brand.

• Franchising a brand before the trademark is registered or at least filed.
• Franchisees relying on the franchisor's licences instead of their own.
• Ignoring reverse charge GST and withholding on foreign royalties.
• Agreements without clear exit and de-branding terms.

Step by step

1. 1Protect the brand

   Franchisor registers trademarks for the brand and logos.

2. 2Document the system

   Prepare operations manuals, training and supply terms.

3. 3Draft the agreement

   Cover fees, territory, standards, IP and termination.

4. 4Franchisee sets up entity

   Form the business and open bank accounts.

5. 5Obtain outlet licences

   FSSAI, trade licence, shop registration and others as required.

6. 6Register for GST

   Both parties register and agree on invoicing for fees and royalty.

7. 7Handle foreign payments correctly

   Reverse charge GST, withholding tax and bank remittance for foreign franchisors.