The Directorate General of Goods and Services Tax Intelligence (DGGI) has issued show-cause notices to more than a dozen food and beverage companies over the use of their trademarks by franchises in states other than where the companies have their registered offices. These notices, issued in the first week of August 2024, demand approximately ₹3,000 crore in Goods and Services Tax (GST) payments for the period starting July 2017, when GST was first implemented.
The issue stems from the DGGI’s stance that franchises and outlets located outside the companies’ home states are registered as distinct entities. As per the GST framework, these entities are liable to pay taxes on the use of trademarks and brand services. A senior official explained, “Tax has to be paid for the use of trademark services, even if there is no monetary exchange between these branches and the parent companies.”
This stance is based on Schedule 1, Entry 2 of the Central GST Act, which treats the supply of goods or services between distinct persons—different GST registrations of the same legal entity—as a taxable transaction, even in the absence of any actual payment.
While franchisees and vendors have been paying fees to parent companies for trademark usage, they have not been paying GST on these transactions, leading to the significant tax demand from the authorities. This interpretation could create challenges for businesses operating across multiple states, according to Saurabh Agarwal, a partner at EY. “If this interpretation is adopted, it will increase the tax burden for businesses operating in multiple jurisdictions,” he said, adding that companies that cannot claim full input tax credit may face even higher costs.
Currently, the GST rate for non-air-conditioned restaurants is 5%, while it rises to 18% for air-conditioned establishments. Restaurants serving alcohol are also subject to the 18% GST rate. These notices come at a time when the food and beverage industry is already grappling with the complexities of a multi-tiered tax system.
Abhishek A Rastogi, founder of law firm Rastogi Chambers, highlighted a key legal nuance: “There is no formal contractual relationship between the registered business place in another state and the supply of a trademark to a distinct entity. Without such a formal contract, these activities are technically not subject to GST.” He further clarified that the distinction between merely using a logo for identification and its commercial use under trademark law could be central to resolving these disputes.
The move is expected to significantly increase the tax liabilities of affected companies, potentially leading to higher costs and further legal challenges in the food and beverage sector.