GST for Franchise Businesses: Fees, Royalty & ITC Explained

Franchising in India runs on the same GST framework as any other business, but the fee structure — franchise fee, ongoing royalty, brand-usage charges, advertising fund contributions — creates a layer of tax questions that a straightforward product-selling business doesn't have. Both sides of a franchise agreement need to get this right: the franchisor charging GST correctly, and the franchisee claiming the ITC they're entitled to.

What Counts as a Taxable Supply in a Franchise Agreement

Under GST, franchise-related payments are treated as a supply of services, not goods — even though the underlying business might be selling physical products. The payments typically covered include:

• Initial franchise fee — the one-time payment for the right to operate under the brand
• Ongoing royalty — usually a percentage of revenue, paid periodically
• Brand/trademark usage fee — for the right to use the franchisor's name and branding
• Advertising fund contribution — mandatory contributions toward centralised marketing
• Technology or software fee — for POS systems, ordering platforms, or other tech the franchisor provides

GST Rates — It Depends on What's Actually Being Supplied

The applicable GST rate isn't uniform across every franchise payment — it depends on the nature of what the franchisor is providing:

What's being supplied	Typical GST rate
Pure brand/trademark license (right to use the name only)	12%
Training, operational support, and other services	18%

Most real-world franchise agreements bundle both — brand usage plus ongoing support — so check how your specific agreement itemises fees, since a single umbrella "franchise fee" line item may need to be assessed against what it's actually covering.

Franchisor Registration and Obligations

A franchisor must register for GST once turnover crosses the standard threshold — ₹40 lakh for goods, ₹20 lakh for services (₹20 lakh and ₹10 lakh respectively in special category states). Once registered, the franchisor is required to charge GST on every franchise fee, royalty payment, and other billable service provided to franchisees, and issue valid tax invoices reflecting the correct rate for each component.

Franchisee Registration and ITC

A franchisee's own GST obligations follow the same standard thresholds as any business — most operating franchise outlets cross this quickly given typical revenue, so GST registration is the norm rather than the exception for anyone running a franchise location.

Claiming Input Tax Credit on franchise payments works the same way it does for any business expense: the franchisee can claim ITC on GST paid on franchise fees, royalties, and supplies purchased from the franchisor, provided:

1. The franchisor is a GST-registered dealer
2. A valid tax invoice is issued for the payment
3. The invoice actually appears in the franchisee's GSTR-2B for the relevant period — see our GSTR-2A vs GSTR-2B guide if you're unsure which statement governs your claim

The Non-Resident Franchisor Case

If your franchisor is based outside India — increasingly common with international brands licensing into the Indian market — and doesn't have a PAN or fixed establishment here, GST on the franchise fees and royalties is generally payable by the franchisee under the reverse charge mechanism, on the franchisor's behalf. If the franchisor does have a fixed establishment in India, they're typically liable to charge and collect GST directly instead, the same as any domestic franchisor.

Before You Sign a Franchise Agreement

Whether you're evaluating a food and beverage franchise, a retail brand, or a quick-commerce dark-store partnership like Blinkit's FOFO or Zepto's COFO model, get clarity on three things before signing:

1. How the fee structure is itemised — brand licensing vs support services, since they carry different GST rates
2. Whether the franchisor is GST-registered and will issue proper tax invoices — without this, your ITC claim has nowhere to attach
3. Your own registration timeline — if you expect to cross the GST threshold quickly (most franchise outlets do), register before your first taxable supply rather than after

If you're setting up the entity to operate a franchise, see our GST registration guide to get registered, and our business structure guidance for choosing between a proprietorship, LLP, or private limited company for the operating entity.

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Related guides: Blinkit vs Zepto Dark Store Franchise · GST Registration for Sellers · MSME Classification Checker · Trademark Registration