GST on franchise fees and royalty in India

Franchising is a supply of services under GST: the franchisor licenses the brand, the system and the territory, and the franchisee pays for it. That makes almost every recurring payment in a franchise relationship a taxable supply, and it makes the franchisor’s invoice a compliance document rather than a request for money.

This guide covers what has to be right on that invoice, and the two structural mistakes that produce documents an accountant will send back.

What is being supplied

The typical franchise relationship produces several distinct supplies, and they are not automatically the same for tax purposes:

• The initial franchise fee — a one-time payment for the right to operate the format.
• Royalty — recurring consideration for the continuing licence.
• Advertising or brand-fund contributions — often collected by the franchisor and spent on the network’s behalf, which raises its own questions about whether the franchisor is supplying a service or acting as a pure agent.
• Training, supply, and support charges — separate services that may classify differently.

Franchise and trade-mark licensing services fall under the 9983 group of the Services Accounting Code, and the SAC most networks use for the franchise licence itself is 998396 (trade marks and franchises). The standard rate applied to these services has been 18% since GST was introduced.

Confirm your own classification with your chartered accountant. Rates and classifications change, and the answer can differ for the fee, the royalty and the ad fund even inside one agreement.

Place of supply, and why it decides CGST/SGST vs IGST

For a service supplied to a registered person, the place of supply is generally the location of that recipient. In practice for franchising:

• Franchisor in Maharashtra, franchisee registered in Maharashtra → intra-state → CGST + SGST.
• Franchisor in Maharashtra, franchisee registered in Madhya Pradesh → inter-state → IGST.

This is not cosmetic. Getting it wrong means the franchisee cannot claim the credit cleanly, and the credit is often the reason they care about your invoice at all. A national network invoices both ways every month, which is precisely why this should be derived from the franchisee’s registration on file rather than decided per invoice by whoever is raising it.

What the invoice must carry

Rule 46 of the CGST Rules sets out the contents of a tax invoice. For a franchise invoice, the fields that most often go missing are:

• Supplier’s name, address and GSTIN
• A consecutive serial number, unique for the financial year
• Date of issue
• Recipient’s name, address and GSTIN (or the details required where unregistered)
• HSN/SAC for the service
• Description, taxable value, and any discount
• Rate and amount of tax, split into CGST/SGST or IGST as applicable
• Place of supply, with the state name, for inter-state supplies
• Whether tax is payable on reverse charge
• Signature or digital signature of the supplier or an authorised person

A spreadsheet export with a total and the word “royalty” on it is not an invoice. Your franchisee needs the document to claim input credit, and the network’s credibility with two hundred franchisees’ accountants is built one document at a time.

The gross-invoice, net-settlement rule

This is the mistake that produces the most rework.

Franchisors routinely settle net of something: a marketing contribution owed back to the franchisee, a supply shortfall, a credit agreed after a dispute. The temptation is to invoice the net figure, because that is the amount that will actually move.

GST does not work that way. The taxable value is the consideration for the supply — the gross royalty — and the offset is a separate matter between the parties. Invoicing the net figure understates the taxable value on the document.

The correct sequence is:

1. Invoice the gross royalty, with GST on it.
2. Record the adjustment as its own entry — a credit note where one is appropriate, or a settlement offset against the running position.
3. Settle the net amount.

Worked through, on a ₹4,21,900 royalty with an agreed ₹12,400 offset and TDS deducted by the franchisee:

Line	Amount
Royalty (taxable value)	₹4,21,900
GST @ 18%	₹75,942
Invoice total	₹4,97,842
Less: settlement offset	− ₹12,400
Less: TDS deducted by franchisee	− ₹42,190
Amount actually received	₹4,43,252

The invoice says ₹4,97,842. The bank shows ₹4,43,252. Both are correct, and a system that cannot hold both simultaneously will keep producing a receivables report nobody trusts.

Credit notes, and when to use one

Where the value of a supply genuinely reduces — a rate revision applied retrospectively, a service that was not provided — a credit note under the GST law is the right instrument, and it has its own timing rules for when the tax adjustment can be claimed. Where the underlying supply is unchanged and you are simply settling something else the parties owe each other, a credit note is the wrong tool and a settlement entry is the right one.

Confusing the two is common and consequential: issuing credit notes for what are really settlements overstates your reductions and understates your output tax.

The ad fund question

Where a franchisor collects an advertising contribution and spends it on the network’s behalf, the treatment depends on the substance of the arrangement — whether the franchisor is supplying a service, or acting as a pure agent recovering costs, which has specific conditions attached under the valuation rules.

This is genuinely fact-specific and worth a conversation with your CA before the first collection rather than after twelve months of them. Whatever the conclusion, keep the ad fund as its own ledger: the accounting question is much easier to answer when contributions and spend are not mixed into general revenue.

A checklist for the next royalty run

• The franchisee’s GSTIN and state are on file and drive the CGST/SGST-versus-IGST split.
• The SAC on the invoice matches how your CA has classified the supply.
• The invoice carries every Rule 46 field, and the serial number is unique for the year.
• The taxable value is the gross royalty, with offsets recorded separately.
• Credit notes are used for genuine reductions in the value of supply, not for settlements.
• The ad fund is invoiced and accounted separately, on advice.