Mr. Gaurav Marya, President of Franchise India Holdings Ltd

What is in store for the Franchise Fraternity?Expansion through set up of franchised stores has become one of the preferred business models for retailers in recent times. The Indian regulations do not provide for any specific legislation regulating franchise arrangement in India. One of the prominent reason being the intricacy of the relationship between the parties and the applicability of various laws depending on the nature of such relationships. Thus, the foremost expectation from the Union Budget 2011-12 would be to grant long awaited legitimacy to the franchise business. The laws regulating franchising in India come within the ambit of Indian company law under the specific heads relating to contract, agency, distribution, leasing, assignment, securities, financial investments, intellectual and other legislations, which may become applicable in particular case. Another important aspect which needs clarity is the tax implications in the franchise business such as the applicability of local sales tax, service tax, property tax, and withholdings tax. Further, how the franchise arrangement is structured and the existence of treaties while dealing with other countries may have considerable influence on the structure adopted between the parties. Till date there has been a lot of ambiguity on the application of service tax in the franchise business despite of having a notification relating to the same. As stated in the notification dated 2003, service tax is payable on the gross amount charged by the franchisor from the franchisee in relation to franchise. The notification attracts numerous doubts on the scope of activities covered and the applicability of the provisions as stated there under. Considering the loopholes in the exact definition and attached ambiguities, the said notification has been an instrument of tax evasion. It is significant to highlight in detail the broader service tax implications in various industries. As an instance, under the Indian service tax law the educational institutes are exempted from the applicability of service tax. However, in franchise business relating to education, the individual service provider is not exempted from the Service Tax Registration and payment if he/she is a franchisee where the turnover of the franchisor is above the exemption limit. Thus it is consequential that all the franchisees will have to get registration with service tax department, collect the service tax from students and deposit the same to the Government even if their individual turnover does not reach the exemption threshold. Such provisions need a critical evaluation in the upcoming Budget 2011-12. Also, the government has received inputs from various sections of the society on opening up of the FDI(Foreign Direct Investment) and the industry is hopeful of at least a thought provocation, if not, a decision on this policy matter in the coming budget. Similarly, the dual taxation aspect in franchising also needs a profound view by the finance minister. Presently, the Indian franchisor is bearing the applicability of dual taxation of service tax and state taxes (VAT, CST) depending on the nature of services/ product sold. Franchise industry has been looking forward to several regulatory as well as policy reforms to facilitate its growth. It is quite evident that the present structure relating to franchise business is not beneficial for the vigorously growing franchise industry. While abolishing the impact of dual taxation, application of a uniform GST, will have its own implications, it is also the need of the hour to integrate the tax structures arising in a franchise business from a long term perspective.