TDS on franchise payments — 194J, 194H, and who deducts what

Here is the situation that breaks most franchise receivables ledgers. You invoice a franchisee ₹4,97,842. They pay ₹4,55,652. Your system flags ₹42,190 outstanding, your team chases it, and the franchisee — who did nothing wrong — gets an unpleasant call.

The missing amount went to the government, deducted at source, on your behalf. It will show up as a credit against your own tax liability. It is not a shortfall. But unless your ledger expects it, every single invoice generates a phantom arrear, and within a quarter nobody believes the ageing report.

Which section applies

Two sections cover most franchise money flows, and they are not interchangeable.

Section 194J covers fees for professional or technical services and royalty. Recurring franchise royalty for the use of a brand, know-how or system generally falls here. The rate commonly applied to royalty and professional fees under this section is 10%, with a lower rate for certain categories such as fees for technical services and call-centre operations.

Section 194H covers commission or brokerage. This is the one that matters for franchise consultants: brokerage earned for introducing an investor to a brand is commission, not royalty. The rate under this section was reduced by the Finance (No. 2) Act, 2024, with effect from 1 October 2024, from 5% to 2%.

Both sections have threshold limits below which no deduction is required, and both have provisions for a higher rate where the recipient has not furnished a PAN. Rates, thresholds and the treatment of specific payments change with almost every Finance Act — treat the numbers here as orientation and confirm the current position with your CA before configuring anything.

Who deducts

The payer deducts. In franchising that produces an asymmetry worth being clear about:

• A franchisee paying royalty to a brand deducts TDS and pays the brand the balance.
• A brand paying a consultant’s brokerage deducts TDS and pays the consultant the balance.
• A master franchisee sits on both sides: it deducts when remitting the brand’s share, and its own sub-franchisees deduct when paying it.

That last case is why master-franchise books are harder than they look. The same organisation is simultaneously a deductor and a deductee, in two directions, in the same month.

What it does to your ledger

The mechanics are simple; modelling them is where systems fail.

	Amount
Taxable value (royalty)	₹4,21,900
GST @ 18%	₹75,942
Invoice total	₹4,97,842
TDS deducted by the franchisee	− ₹42,190
Bank receipt	₹4,55,652

Two details in that table matter:

TDS is computed on the taxable value, not the invoice total. In the ordinary case the deduction is made on the amount excluding GST — deducting on the GST-inclusive figure is a common error that over-deducts and creates a second reconciliation problem.

The receivable should close at ₹4,97,842, not ₹4,55,652. The invoice is settled by two things together: the bank receipt and the TDS credit. A ledger that only recognises cash will never close it.

The reconciliation that has to happen

The deduction is a credit you claim, but only if it reaches your PAN correctly.

1. The franchisee deducts and deposits the TDS, and files their quarterly statement.
2. The deposit appears against your PAN in Form 26AS and the annual information statement.
3. The franchisee issues Form 16A, the certificate for the deduction.
4. You match what you expected to what actually landed.

Step 4 is where franchise networks lose money. If a franchisee deducts but does not deposit, or deposits against the wrong PAN or quarter, you have given a discount without knowing it. Across two hundred outlets, unmatched TDS is a real number.

The practical discipline is to record the expected deduction at invoice time, so that reconciliation is a comparison rather than an investigation. If your system knows it should be looking for ₹42,190 against a particular franchisee for a particular quarter, the missing ones surface on their own.

Lower or nil deduction

A recipient can apply for a certificate for deduction at a lower rate or nil rate where their overall liability justifies it. Where a franchisor holds such a certificate, franchisees must deduct at the certified rate — which means the certificate has to reach every deducting franchisee, not just sit in the franchisor’s file.

For a network of any size, that is a distribution problem: a certificate obtained in April is worth nothing if half the network is still deducting at the standard rate in September.

What good looks like in a system

• The invoice records the expected TDS section and amount at the time it is raised.
• The receivable closes on cash plus credit, not cash alone.
• Expected deductions are tracked per counterparty per quarter, so unmatched ones are visible.
• Consultant brokerage is classified under the commission section rather than being lumped in with royalty, because the section and the rate differ.
• A lower-deduction certificate can be recorded once and applied across every franchisee’s deductions.

The one-line version

A franchisee who pays less than the invoice is usually complying with tax law, not disputing your bill. Build the ledger that knows the difference, and the monthly conversation about “outstanding” disappears.