GST on Franchise Fees, Royalty Payments, and IP Licensing in India

Franchise & IP Licensing Under GST

Franchise fees, brand royalty, and IP licensing payments are taxable at 18% under GST. For cross-border royalty, RCM applies under Section 5(3) IGST Act. Franchisees can claim ITC subject to Section 17(5). Related-party valuations follow Rule 28 CGST Rules. (Source: CGST Act 2017, IGST Act 2017, Notification No. 11/2017-CT(R))

GST on Franchise Fees, Royalty, and IP Licensing

India's franchise industry generates over Rs 50,000 crore in annual revenue. Every franchise arrangement involves at least two taxable GST events: the initial franchise fee and the recurring royalty or brand-use payment. Add cross-border IP licensing, technology transfers, and multi-state operations to the mix, and the compliance picture becomes layered.

This guide breaks down the GST treatment of franchise fees, royalty payments for intellectual property, and licensing arrangements. Whether you are a franchisor structuring your network, a franchisee managing compliance, or a business licensing foreign IP, the rules here determine your tax outflow, ITC eligibility, and filing obligations.

Why Franchise Fees and Royalty Attract GST

A franchise arrangement is a supply of service under GST. The franchisor provides the franchisee with the right to use a brand name, trademark, business model, operating procedures, and ongoing support. In return, the franchisee pays an initial franchise fee plus recurring royalty (typically a percentage of gross revenue).

Under paragraph 5(c) of Schedule II of the CGST Act, 2017, a temporary transfer or permitting the use or enjoyment of any intellectual property right is treated as a supply of service. This means both the upfront franchise fee and the monthly or quarterly royalty are taxable supplies, not capital transactions exempt from GST.

The taxability holds regardless of how the franchise agreement labels the payment. Whether it is called a "brand fee", "license fee", "know-how charge", or "system access fee", the substance determines classification, not the label.

SAC Codes and GST Rates for Franchise & IP Services

The correct classification determines the GST rate and return reporting. Here are the SAC codes relevant to franchise and IP licensing arrangements:

Franchise and Trademark Licensing

SAC 997336 is the primary code for franchise arrangements. It covers the right to use a trademark, trade name, service mark, or franchise system. Both the initial one-time franchise fee and the ongoing royalty fall under this code.

Technology Transfer Services

Technology transfer arrangements where the licensor provides manufacturing know-how, process documentation, or technical assistance alongside the IP license are typically classified under the 9985 group (support services) at 18%.

Key Rate Exceptions

Not all IP licensing attracts 18%. Two notable exceptions:

1. Printed books and educational content: Licensing rights to reprint books (SAC 997334) can attract nil GST when the underlying goods (printed books) are themselves exempt under HSN 4901. The exemption applies to the licensing of educational and literary content, not to software or digital publications.

2. Films and sound recordings: Licensing of exhibition rights for cinematograph films attracts 12% GST under certain notifications, while music licensing for commercial use attracts 18%.

Franchise Fee: Initial and Recurring Components

A typical franchise arrangement has two payment streams, and GST applies to both:

Initial Franchise Fee

This is the one-time, non-refundable payment the franchisee makes to join the franchise network. It typically covers:

• Right to use the brand name and trademark
• Access to proprietary business systems and manuals
• Initial training and onboarding
• Territory rights (exclusive or non-exclusive)

GST at 18% applies on the full amount. If the franchisor is in Mumbai (Maharashtra) and the franchisee is in Bengaluru (Karnataka), the supply is inter-state and IGST at 18% applies. If both are in the same state, it is CGST 9% + SGST 9%.

Ongoing Royalty

The monthly or quarterly royalty, typically 3% to 8% of gross revenue, is a continuous supply of service. Each royalty invoice is a separate taxable supply at 18% GST. The time of supply is the earlier of the date of invoice or the date of receipt of payment.

Marketing fund contributions (often 1% to 2% of revenue, paid by franchisees into a common marketing pool) are also taxable at 18% if the franchisor controls and deploys the fund. The franchisor issues a tax invoice for each collection.

Place of Supply: IGST vs CGST+SGST

The place of supply for franchise and licensing services follows Section 12(2) of the IGST Act for domestic supplies: the location of the recipient.

For franchise networks with outlets across multiple states, the franchisor raises IGST invoices to all out-of-state franchisees and CGST+SGST invoices to same-state franchisees.

Reverse Charge on Royalty Paid to Foreign IP Owners

This is where franchise networks with international parent companies or Indian businesses licensing foreign IP need to pay close attention.

When an Indian franchisee or licensee pays royalty, brand fee, or technology license fee to a foreign entity (a person located outside India), the supply qualifies as an import of service under Section 2(11) of the IGST Act. The Indian recipient pays IGST under the Reverse Charge Mechanism.

Legal Basis

• Section 5(3) of the IGST Act permits the government to notify services where the recipient pays tax.
• Notification No. 10/2017-Integrated Tax (Rate) notifies that any service supplied by a person located in a non-taxable territory to a person located in a taxable territory (other than a non-taxable online recipient) is subject to RCM.
• The supply is treated as inter-state under Section 7(4) of the IGST Act, so IGST (not CGST+SGST) always applies.

RCM Compliance Steps

1. Self-invoice: The Indian recipient issues a self-invoice (or payment voucher) since the foreign supplier will not issue a GST invoice.
2. Pay IGST in cash: Report in GSTR-3B Table 3.1(d). RCM liability must be discharged in cash through the electronic cash ledger. You cannot use ITC to pay RCM tax.
3. Claim ITC: In the same GSTR-3B, claim the IGST paid as ITC in Table 4A(2) (import of services), provided the service is used for taxable business purposes and is not blocked under Section 17(5).
4. Time of supply: The earlier of the date of payment to the foreign entity or 60 days from the date of the supplier's invoice (Section 13(3) of the CGST Act read with Section 20 of the IGST Act).

The net cash outflow on RCM for business-use IP licensing is typically nil, since the same tax paid in cash comes back as ITC. The real cost is interest exposure if you miss reporting it.

ITC on Franchise Fee and Royalty Payments

When ITC Is Available

ITC on franchise fees and royalty is available under Section 16 of the CGST Act when:

• The franchise fee or royalty is used in the course or furtherance of business
• The franchisee holds a valid tax invoice (or self-invoice for RCM)
• The supplier has filed the return and the tax is reflected in the franchisee's GSTR-2B
• Payment is made to the supplier within 180 days of the invoice date (Rule 37 of the CGST Rules). If not paid within 180 days, ITC already claimed must be reversed with interest

When ITC Is Blocked

ITC is not available in these scenarios:

1. Restaurant franchisees on 5% rate: Restaurants outside specified premises charge 5% GST on food services under Notification 11/2017-CT(R) on the condition that they take no ITC on all inputs and input services, including franchise fees and royalty. This is a deliberate trade-off: lower output tax rate in exchange for no ITC.

2. Personal consumption: If any part of the franchise fee relates to personal use (Section 17(5)(g)), ITC is blocked to that extent.

3. Non-business use: If the IP is not used for making taxable supplies, ITC is proportionally restricted under Section 17(1) and 17(2).

The 180-Day Rule (Rule 37)

If the franchisee does not pay the franchise fee or royalty to the franchisor within 180 days from the date of invoice, the ITC already claimed must be reversed. It can be reclaimed only when actual payment is made. This is particularly relevant for franchise arrangements with deferred payment terms or disputed royalty calculations.

Valuation for Related-Party Franchise Arrangements

Many franchise networks involve related parties. The franchisor may hold equity in the franchisee, or directors may overlap. Under Section 15(4) of the CGST Act, when the supplier and recipient are related persons and the price is not the sole consideration, the value of supply must be determined under the CGST Valuation Rules.

Rule 28 of the CGST Rules governs valuation for supplies between related persons or distinct persons:

1. Open market value: The value of supply is the open market value of the service. If the same franchisor charges unrelated franchisees Rs 10 lakh as a franchise fee, that is the benchmark for related-party franchisees.

2. Full ITC exception: If the recipient (franchisee) is eligible for full ITC, the value declared in the invoice is deemed to be the open market value. This significantly eases compliance for B2B franchise arrangements where the franchisee takes full credit.

3. Comparable value: If open market value is not available, the value of a supply of like kind and quality is used.

4. Rule 30 / Rule 31: If value cannot be determined under Rule 28, Rule 30 (cost plus 10% markup) or Rule 31 (residual method using reasonable means) applies sequentially.

For franchise networks where some franchisees are related and others are not, the royalty percentage charged to unrelated franchisees establishes the arm's length benchmark. Charging related franchisees a lower royalty rate without justification invites valuation disputes during audit.

GST Registration for Franchise Networks

Franchisee Registration

Each franchisee is a separate taxable person. Registration is mandatory if:

• Aggregate turnover exceeds Rs 20 lakh (Rs 10 lakh in Manipur, Mizoram, Nagaland and Tripura)
• The franchisee makes inter-state taxable supplies of goods (registration is mandatory regardless of turnover under Section 24; persons making inter-state supplies of services are exempted below the threshold by Notification 10/2017-Integrated Tax)
• The franchisee is liable to pay tax under RCM (e.g., paying royalty to a foreign franchisor)

Multi-State Operations

A franchise network operating across multiple states needs separate registration in each state where it has a place of business. A franchisor with a head office in Maharashtra and regional offices in Karnataka and Delhi needs three GSTINs. Each GSTIN files separate GSTR-1 and GSTR-3B returns.

Supplies between distinct persons (same entity, different state registrations) are treated as taxable supplies under Section 25(4) and must be invoiced at open market value under Rule 28.

E-Invoicing for Franchise Networks

E-invoicing is mandatory for all B2B, B2G, and export invoices issued by businesses whose aggregate turnover exceeds Rs 5 crore in any financial year from FY 2017-18 onwards. This threshold catches most established franchise networks.

For franchisors, every invoice raised on franchisees (franchise fee, royalty, marketing fund contribution, training charges) must be reported to the Invoice Registration Portal (IRP) and carry a valid IRN (Invoice Reference Number) and QR code.

Key compliance points:

• 30-day reporting window: From 1 April 2025, businesses with aggregate turnover of Rs 10 crore or more must report e-invoices to the IRP within 30 days of the invoice date (GSTN advisory, 5 November 2024).
• B2C exemption: Invoices to end consumers (the franchisee's sales to customers) do not require e-invoicing, but the franchisor's B2B invoices to franchisees do.
• Cancellation window: E-invoices can be cancelled on the IRP within 24 hours of generation. After that, a credit note must be issued.

Worked Example: Food Franchise Chain with 50 Outlets

Let us walk through the GST flow for "SpiceBowl", a fictional food franchise headquartered in Mumbai with 50 outlets across India.

Setup

• Franchisor: SpiceBowl India Pvt Ltd, Mumbai (Maharashtra)
• Outlets: 50 franchisees across 12 states
• Initial franchise fee: Rs 10 lakh per outlet (one-time)
• Monthly royalty: 5% of gross revenue
• Average monthly revenue per outlet: Rs 15 lakh
• Restaurant GST rate: 5% without ITC (Notification 11/2017-CT(R))

Step 1: Initial Franchise Fee

For a franchisee in Bengaluru (Karnataka):

The Bengaluru franchisee pays Rs 11,80,000 to SpiceBowl. SpiceBowl reports Rs 1,80,000 as IGST output in its GSTR-3B.

For a franchisee in Mumbai (Maharashtra):

Step 2: Monthly Royalty

Each outlet with Rs 15 lakh monthly revenue pays 5% royalty:

Across 50 outlets, SpiceBowl collects Rs 37.50 lakh in royalty and Rs 6.75 lakh in GST monthly.

Step 3: ITC Impact on the Franchisee

Here is the critical practical point. SpiceBowl franchisees charge 5% GST on food served to customers (without ITC, as per the concessional restaurant rate). This means:

The franchisee cannot set off the Rs 13,500 GST paid on royalty against the Rs 75,000 output tax on food services. The royalty GST becomes a pure cost.

If the same franchisee were operating a non-restaurant business (say, an education franchise at 18% GST), the Rs 13,500 ITC would be fully available, and the net cost of royalty GST would be nil.

Step 4: Foreign Franchisor Scenario

If SpiceBowl were a UK-based company licensing its brand to Indian franchisees:

The Indian franchisee pays Rs 13,500 IGST in cash under RCM, reports it in GSTR-3B Table 3.1(d), and files the self-invoice. For non-restaurant businesses, ITC recovery makes the GST cost-neutral. The withholding tax obligation under the Income Tax Act is separate and runs in parallel.

Compliance Checklist for Franchise Networks

Common Errors and How to Handle Them

Step 1: Misclassifying franchise fees as "sale of goods"**: Some franchise agreements structure the initial fee as a "sale of rights". Under GST, transfer of the right to use IP is a supply of service (Schedule II), not goods. Misclassification leads to wrong HSN/SAC codes on invoices and potential demands during audit.

Step 2: Missing RCM on foreign royalty**: Indian franchisees of international brands frequently overlook the RCM obligation because the foreign invoice carries no GST. The liability arises regardless of whether the foreign entity is registered in India.

Step 3: Claiming ITC under the 5% restaurant scheme**: Restaurant franchisees on the concessional 5% rate cannot claim ITC on any input, including franchise fees. Claiming it triggers demand with interest under Section 73 or 74.

Step 4: Ignoring Rule 28 for related parties**: If the franchisor and franchisee are related persons, charging below-market royalty invites valuation adjustment. Maintain documentation of arm's length pricing.

Step 5: Late e-invoice generation**: Missing the 30-day e-invoice reporting window (for turnover of Rs 10 crore or more) means the IRP rejects the invoice, so it has no IRN and is not a valid tax invoice. The recipient cannot claim ITC on an invoice without a valid IRN.

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Tax Garden Can Help

Franchise GST compliance touches registration, invoicing, ITC reconciliation, RCM, e-invoicing, and annual returns across multiple states and entities. A missed RCM self-invoice or a wrongly claimed ITC under the 5% restaurant scheme can trigger demands with interest and penalty.

Tax Garden manages end-to-end GST compliance for franchise networks and IP licensees. From multi-state registration to monthly return filing, RCM discharge, GSTR-2B reconciliation, and GSTR-9 annual returns, we handle the compliance so you can focus on growing the franchise. Talk to us about your franchise GST requirements.

This guide covers GST on franchise fees, royalty payments, and intellectual property licensing in India, including SAC codes, reverse charge mechanism, ITC eligibility, related-party valuation, and e-invoicing obligations. The GST rates (18% for SAC 997336), RCM provisions under Section 5(3) IGST Act and Notification 10/2017-IT(R), ITC rules under Section 16/17(5) CGST Act, and valuation under Rule 28 CGST Rules have been verified against the CGST Act 2017 text, IGST Act 2017 text, CBIC notifications at cbic-gst.gov.in, the GST Council SAC classification at gstcouncil.gov.in, and published analysis by ClearTax and IndiaFilings. The 5% restaurant GST rate and its ITC restriction are per Notification 11/2017-CT(R). Confirm the current rules with your CA or tax advisor before filing.

Frequently Asked Questions

What GST rate applies to a franchise fee and monthly royalty?

Both the one-time franchise fee and the recurring royalty are taxed at 18% as licensing of a trademark or franchise, usually under SAC 997336. A franchisor and franchisee in the same state split it as 9% CGST and 9% SGST; across states it is 18% IGST. Marketing fund contributions collected and controlled by the franchisor are also taxable at 18%.

Can a restaurant franchisee claim input tax credit on the royalty it pays?

Not if the outlet charges the 5% restaurant rate, which comes with a condition that no input tax credit is taken on any inputs or input services, including franchise fees and royalty. For such franchisees, the 18% GST on royalty is a real cost. Franchisees in businesses taxed at 18%, such as education or retail services, can generally claim it in full.

How is GST paid on royalty to a foreign brand owner?

Royalty or brand fee paid to a franchisor outside India is an import of services, so the Indian franchisee pays 18% IGST under reverse charge. It issues a self-invoice, pays the tax in cash, reports it in GSTR-3B, and claims it back as credit in the same return if eligible. Income-tax withholding on the royalty is a separate obligation.

What happens to input tax credit if a franchisee delays paying royalty?

If the franchisee does not pay the franchisor within 180 days of the invoice date, the credit already claimed on that invoice must be reversed, with interest. The credit can be claimed again once payment is actually made. This matters for deferred payment terms or disputed royalty calculations, so track unpaid franchise invoices by age.

Can a franchisor charge lower royalty to a related franchisee?

It can, but GST value between related persons is tested under Rule 28 at open market value, and royalty charged to unrelated franchisees is the natural benchmark. If the related franchisee is eligible for full input tax credit, the invoice value is deemed to be open market value, which removes most of the risk. Keep a written basis for any lower rate.