The Indian economy has really witnessed a revolution of sorts in recent times, and many ways of doing business are springing up in India. People start businesses themselves, in partnership with somebody or as companies. One difficulty people face when they start is marketing and familiarizing people with their brand. This is where ‘franchising’ becomes useful, since it gives an entrepreneur the benefit of someone else’s brand. A person starting a McDonald’s restaurant does not need to worry about marketing, for example. It also gives a young, inexperienced company the insights and experience of the company which they are franchising, instead of learning through trial and error.
It is impossible to point to any one law governing franchising in India. Laws relating to contract, agency, distribution, leasing, investments, intellectual property, companies (in most cases), property, labour and investment, and also banking and insurance, may be used. Naturally, everything depends on the situation in that case, which is why the franchise agreement between the parties needs to be framed very carefully.
Financial aspects: Royalty and taxation
Royalty payment: If both the parties are Indian, the royalty fees are decided by a contract between them. If the company is foreign but the person taking the franchise is Indian, certain FEMA (Foreign Exchange Management Act) and RBI (Reserve Bank of India) rules apply.
Tax payments by the franchisor and franchise taker (franchisee): As per law, if the franchisor charges royalty payment from the franchise, the company must pay tax on it, as income deriving from Indian soil. If either the franchisor or the franchise taker hire people and pay them salaries, tax may be deducted at source. The franchise will have to pay the local sales tax, property tax and other taxes applicable.
This was just a brief introduction to the law governing franchises in India. If you are considering starting a franchise, we recommend that you consult a lawyer. Choose ‘Contracts and Commercial’ on http://www.vakilsearch.com to find a lawyer in your city to answer your franchise related questions.