The Directorate General of Goods and Services Tax Intelligence (DGGI) has issued show-cause notices to more than a dozen food and beverage companies, citing improper GST payment on trademark usage by their franchises and outlets located outside their home states. The notices, sent in early August, demand a total of ₹3,000 crore from the companies, covering the period from July 2017 when GST was introduced.
According to DGGI, franchises and outlets operating in states other than where the parent companies are registered are liable to pay GST on the use of the trademark. "Tax must be paid for trademark services," a senior official confirmed.
Although franchise holders have been paying fees to the parent companies for brand usage, GST was not being applied to these transactions. Under the Central GST legislation (Schedule 1, Entry 2), supplies of goods or services between distinct persons—different registrations of the same legal entity—are taxable even if no monetary exchange occurs.
Tax authorities argue that brand usage by a franchise or branch in a different state qualifies as a service provided by the head office. However, industry experts warn that this interpretation could significantly increase compliance burdens for businesses operating in multiple jurisdictions.
The GST rates applicable to these businesses vary, with non-air-conditioned restaurants taxed at 5%, while air-conditioned ones and outlets serving alcohol face an 18% GST rate.
Experts further caution that the classification of brand usage as a taxable service could create additional tax liabilities for companies that cannot claim full input tax credit. The absence of formal contracts for trademark use between the main office and other state-based franchises complicates the issue, as the activity may not qualify as a taxable supply.
The DGGI's move is expected to escalate tax complexities and inflate the overall tax burden for the food and beverage sector.
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