Taxation Aspect? Taxation is another issue which receives due consideration.

It is important to know the local sales tax, property tax, and withholding tax applicable in a certain area. Furthermore, how the franchise arrangement is structured and the existence of treaties between the countries involved may have considerable influence on taxation. The situations and types of taxes that apply to franchising in India are described below: Where the franchisor receives royalties service or franchise fees, tax has to be paid under the Income Tax act, 1961 as income „arising‟ and „accruing in India‟, whether the franchisor is an Indian or foreign party. If the franchise is wholly based in India, then the franchisor and franchisee as separate companies or partnerships will be subject to the taxes applicable to all Indian Companies incorporated under the Companies Act, 1956. In a case where the franchisor is a foreign party and the franchisee is Indian, and the franchisor sends technicians and supervisors to India, the salaries payable to these persons would be subject to personal income tax, whether an arrangement is made to deduct the tax at source or they are taxed as self employed persons if they come as consultants. If the franchise agreement provides that the franchisee shall export or sell to the franchisor some of the goods produced by it, then taxes will be levied on the deemed profits. If the master franchisor is a foreign company, it will be taxed only on income that arises from operations carried out in India or in certain cases, on income that is deemed to have arisen in India. The latter includes royalties, fees for technical support, interest, gains from sale of capital assets situated in India and dividends from Indian companies. Advance tax has to be paid by both, Indian and foreign corporate assesses, whose taxable income exceeds Rs. 5000/- p.a. In calculating the amount of tax payable by the franchisor / franchisee company as assessee, the deductions available in Section 30 to 43D of the Income Tax Act, 1961 can be important for tax planning purposes. Some of these relate to: Rent, rates, taxes, repairs and insurance in respect to premises used for business. Depreciation Expenditure on scientific research Expenditure of a capital nature on acquisition of patent rights or copyrights The availability of tax advantages would depend on the type of franchise, the product of the franchise and where the unit is to be physically located. Collection of Tax – the income received by the foreign franchisor are taxable, and these have to be paid in India through an agent which could be the sub-franchisee himself. Capital Gains Tax is relevant to a franchise business as any profits and gains arising from the transfer of a capital asset effected in the previous year is chargeable to income tax under the head “capital gains”. Advance ruling on Taxation – if a foreign Master Franchisor has any apprehensions or uncertainties regarding the tax implications of any venture or transaction in India, a reference or application can be made to the Advance Ruling Authority under Section 245N of the Income Tax Act, 1961.

. Section 90 of the income tax act gives recognition to this and this agreement takes precedence over the terms of the income tax act. The tax liability would accordingly be reduced.It must be noted that the above is subject to Double Taxation Avoidance Agreements entered into by India with any foreign country.

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