MNCs using franchisee model may face higher GST | Economic Times

Multinational fast food and hotel chains and tech companies that operate through franchisee models in India have come under the taxman’s lens over their royalty income with the indirect tax department questioning the nature of agreement with their franchisees and demanding higher GST.Under the franchisee model, multinationals allow Indian companies to operate certain stores, hotels or entities with their global brand name, against which they charge a percentage of profit or royalty or any other income.Most multinationals pay 12% goods and services tax (GST) on the amount, but the department is seeking to levy 18% GST, people familiar with the matter told ET.That is because GST on payment against the “right to use” a brand name is 12% while it is 18% in case of “transfer of right to use” a brand name. Multinationals claim they are not transferring the brand name or allowing the Indian entity to use the brand name for perpetuity, hence the applicable GST is 12%.The indirect tax department, however, argues that this is just nomenclature aimed at tax arbitrage. And it has started issuing notices in this regard.“There has always been a dispute between ‘right to use’ and ‘transfer of right to use’ and this distinction in the GST continues to be relevant as tax rates are different in two categories, thereby raising the larger fundamental question of rate rationalisation between 12% and 18% categories,” said Abhishek A Rastogi, partner at law firm Khaitan & Co.85755120In India, several multinationals operate through different franchise models.Most multinational fast-food chains tend to allow micro geography-based exclusivity. For instance, a burger joint can allow one franchisee in Churchgate in Mumbai, but that doesn’t mean it would not allow another in Nariman Point in the same city.Some mobile companies, too, allow similar franchisee models for their ‘app stores’ or ‘exclusive brand stores’ in an area.In most cases, the contract mentions that the contract is for 99 years or so.The tax department claims that in essence these contracts are drawn to save taxes and hence wants to scrutinise them using the ‘substance over form’ principle.“Facts in such situations are extremely important as first distinction needs to be created between the goods (permanent transfer) and services (temporary transfer) and thereafter assess whether there is any transfer of right to use,” Rastogi said. Going ahead, some of the software companies too could come under the scanner around royalty charged on their products, tax experts said.Brand name and applicability of GST on that has always been a touchy issue for multinationals and large Indian conglomerates.Earlier, too, the indirect tax department had questioned some multinationals, Indian conglomerates and foreign banks on allowing their subsidiaries or entities to use their brand name.And whether any consideration is paid towards the brand usage by the subsidiaries or Indian entities.The indirect tax department wanted these entities to put a valuation on the brand names and logos, charge fees from the subsidiary or group company, and pay 18% GST on that, according to people with direct knowledge of the matter, as ET had first reported in 2019.Some of the largest companies and conglomerates were under the tax department’s scanner. The issue, however, did not gain momentum as the department decided to go slow on the investigations in the following months due to Covid pandemic, insiders said.