Franchising Law in India
There is no specific legislation regulating franchise arrangement in India, reason being the complexity of the relationship and the vast areas of law which such relationship involve.
The laws regulating franchising in India includes –law relating to contract, agency, distribution, leasing, assignment, securities, financial investments, intellectual and industrial property, competition, companies, immovable and movable properties, labour, foreign investment, insurance, banking, import-export, technology transfer, and other legislations which may become applicable in particular case.The applicability of laws depends precisely upon the modes of franchising which may be domestic or transborder.
The FEMA and RBI regulate the terms of payment under Franchise Agreements(such as franchise fees, management fees, development fees, administrative fees, royalty fees and technical fees) where one party is a non-Indian entity including the amount to be paid and procedure for remittance of these payments outside India. The RBI prescribes certain requirements such as furnishing of tax clearances and chartered accountant certificate at the time of remittance of royalty payments by the franchisee to franchisor outside India.
The Indian government permits foreign franchisors to charge royalties up to 1% for domestic sales and 2% on exports for use of the foreign franchisor’s brand name or trademark, without transfer of technology. The laws in India also permit lump sum and royalty payments to be made by Indian franchisees to their foreign counterparts for use of foreign techno logy, which includes manuals, systems etc. Lump sum payments up to US$ 2 million are permitted and royalties of 5% on domestic sales and 8% on exports can be paid to the foreign franchisor. In addition, foreign companies can enter into consulting agreements and receive up to US$ 1 million per project. Amounts in excess of these can also be received but with the permission of the Indian Government. These rules allow a foreign franchisor to structure its business in India in such a way so as to ensure that it can repatriate the maximum amount from India.
The Government has specified formula for calculation of royalties which must be adhered to before the foreign company can remit funds out of India. If the franchise agreement proposes royalties or lump sum fees beyond the specified limits, the approval of the Foreign Investment Promotion Board is required.
Taxation is another issue which deserves due consideration. It is important to know the local sales tax, property tax, and withholdings tax applicable in certain area. Further, how the franchise arrangement is structured and the existence of treaties between the countries involved may have considerable influence on the structure adopted.
Where the franchisor receives royalties, service or franchise fees, tax has to be paid under the income tax Act (as income arising and accruing in India), whether the franchisor is an Indian or foreign. In case where the foreign franchisor sends training personnel and supervisors to India, the salaries payable to these persons may 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 (professionals).
In calculating the amount of tax payable by the franchisor or the franchisee company, the deduction available in tax laws of India can be important for tax planning purposes. Sometimes of these relate to rent, repairs and insurance in respect to premises used for business; depreciation and expenditure on research; and, expenditure of capital nature on acquisition of patent rights or copyrights. However, the availability of tax advantages depends on the type of franchise, the product of the franchise and unit locations.