A Primer on Franchising in India

• Published in: Franchise law journal Vol. 38; no. 4; pp. 607 - 626
• Main Authors: Das, Srijoy, Kumar, Anup, Chadha, Harsahib
• Format: Journal Article
• Language: English
• Published: Chicago American Bar Association 22.03.2019
• Subjects: Agreements; Antitrust law; Compliance; Contracts; Control; Corporations; Data security; Dividend distributions; Ethical aspects; Evaluation; Foreign exchange; Foreign exchange controls; Foreign investment; Foreign investments; Foreign residents; Franchisees; Franchises; GDP; Grants; Gross Domestic Product; GST; Income taxes; Intellectual property law; Joint ventures; Laws, regulations and rules; Management; Noncitizens; Privacy; Subsidiary corporations; Tax rates; Tax regulations; Taxation; Transfer pricing; Withholding taxes; India
• ISSN: 8756-7962; 2163-2154

India is home to over 1.34 billion people and has the sixth largest economy in the world with the gross domestic product of $2.6 trillion (USD).1 Market studies in this area suggest that India may become the third-largest consumer economy in the world by the year 20252 and the second-largest economy in terms of purchasing power parity by the year 2050.3 With the liberalization of India's economy in 1991, a large number of international brands have ventured into India using the franchise model. People in different states have different cultures, lifestyles, and food habits. [...]the potential franchisor should undertake extensive market research in India to determine (1) market conditions for the franchisor's products and services in different regions of India and the extent to which product and service offerings need to be customized to suit the various segments of the Indian market; and (2) prospective franchisee's qualifications, and ability to scale the franchise business profitably. Due to vastly different cultural practices in different regions, a franchise business in India is largely dependent on the standing of local franchisees. [...]the franchisor should carry out due diligence on the potential franchisee to determine if the franchisee (1) has adequate net worth and sound financial background to operate and scale the franchise business in India; (2) has a sound legal standing without a history of defaults; and (3) meets the franchisor's eligibility criteria for the business specific to the Indian market conditions. The IT Act divides taxpayers in India into seven different categories15 and prescribes conditions for determination of residential status for various categories of taxpayers in India.16 All companies incorporated in India are deemed to be resident entities, even if they are owned or controlled by foreign companies or foreign residents.17 The income tax rate is subject to revision every financial year by the Government of India.18 In addition to income tax, Indian franchisees may have to also pay certain additional direct taxes such as capital gains taxes, or dividend distribution taxes, as the case may be, at the applicable rates.19 Effective July 1, 2017, the Government of India revamped the previous indirect tax regime by scrapping a large number of indirect taxes that were levied by state and central governments and replaced them with the GST Laws.