Franchise Business in India: Taxation, Compliance & Legal Guide (2025)
Introduction
India’s expanding consumer base and entrepreneurial spirit have made franchise business in India a booming sector. From global giants like McDonald’s to domestic powerhouses like Chai Sutta Bar, franchises offer scalable opportunities. However, the success of a franchise depends not just on the brand but also on regulatory and tax compliance. This blog by Makwana Sweta & Associates, your trusted Chartered Accountant in Mumbai, provides a step-by-step guide to starting, managing, and staying compliant with a franchise in India in 2025.
What Is a Franchise Business?
A franchise is a legal agreement where the franchisor (brand owner) grants the franchisee (local business operator) the rights to operate a business using the brand’s name, system, and products/services.
There are typically two major models in India:
- Product Distribution Franchise: Like automobile dealerships
- Business Format Franchise: Like fast food chains (KFC, Domino’s)
Why Choose a Franchise Model?
Franchising reduces startup risks as you operate under a proven brand with a defined SOP. It offers:
- Established brand identity
- Training & marketing support
- Reduced operational guesswork
- Quicker break-even
According to Franchise India, the franchise sector contributes nearly 2% to India’s GDP and is expected to grow at 30–35% CAGR.
Legal Requirements for Starting a Franchise in India
1. Business Registration
Choose an appropriate entity structure:
- Sole Proprietorship
- Partnership
- LLP
- Private Limited Company (most preferred)
A Private Ltd. Co. offers liability protection and builds credibility with franchisors.
2. Franchise Agreement
Must include:
- Rights and obligations of both parties
- Territory allocation
- Royalty and fee structure
- Training, branding, and support
- Termination clauses
Tip: Always consult a legal advisor to vet the franchise agreement.
3. Trademark Licensing
The franchisor must own a registered trademark. A proper licensing agreement ensures there are no IPR issues.
4. FSSAI & Other Licenses
If the business involves food, health, education, or retail, licenses from respective authorities are mandatory:
- FSSAI (for food)
- Shops & Establishments License
- Trade License
- GST Registration
Taxation of Franchise Businesses
1. GST Implications
- Franchise fees and royalties attract 18% GST under supply of service.
- The franchisor must raise proper tax invoices.
- Franchisees must register under GST regardless of turnover.
Example: A franchisee paying Rs. 10 lakh as annual royalty will pay Rs. 1.8 lakh GST.
2. TDS Deduction
Under Section 194J, if royalty paid exceeds Rs. 30,000/year, franchisee must deduct 10% TDS before payment.
3. Income Tax
- The franchisee’s profits are taxed under Income from Business & Profession.
- If turnover < Rs. 3 crore and digital receipts > 95%, they may opt for Section 44AD presumptive taxation.
4. Advance Tax
If tax liability exceeds Rs. 10,000/year, franchisees must pay advance tax in 4 instalments during the year.
Compliance Checklist for Franchise Business
| Area | Compliance Requirements |
|---|---|
| GST | Registration, timely filing, invoice issuance |
| Income Tax | ITR filing, TDS deduction, Advance Tax |
| ROC (for Pvt Ltd) | Annual filing, board resolutions |
| FSSAI | License, hygiene audits |
| Trademark Use | Ensure it is legally licensed from franchisor |
Common Mistakes to Avoid
- Ignoring Legal Agreements: Leads to future conflicts.
- Wrong Business Structure: Impacts taxes and fundraising.
- Not Accounting GST Properly: Leads to penalties.
- Improper Royalty Reporting: Attracts TDS defaults.
- Assuming PAN-India Rights Without Proof: Territorial rights should be explicitly mentioned.
Expert Tip from Makwana Sweta & Associates
Many new entrepreneurs forget that franchise operations require dual compliance—first as an independent business and second as a contractual partner. Engage a CA in Mumbai with franchise experience to manage taxation, reporting, and periodic audits.
We also assist in:
- Franchise feasibility studies
- Return on investment calculations
- Multi-state GST compliance
- Tax planning and representation
Final Thoughts
Franchising is one of the fastest routes to entrepreneurial success in India—but only if done right. With accurate registration, strong legal contracts, and timely tax compliance, your franchise venture can thrive in 2025 and beyond.
For full support in tax and regulatory matters related to franchise business in India, consult Makwana Sweta & Associates—trusted providers of CA services in Mumbai and across India.
Useful Links
- Inbound: How can a CA help you throughout your Business
- Outbound: FSSAI Licensing System