As businesses across India continue to evolve in 2025, one aspect that remains critical for franchise owners is GST compliance. The Goods and Services Tax (GST) regime has been in place for several years, but it is still essential to stay up-to-date with regulations and ensure that all aspects of your franchise operations are compliant. Whether you’re starting a new franchise or managing an established one, understanding GST requirements and adhering to them can save you from unnecessary penalties and streamline your operations.
In this blog, we’ll take a deep dive into GST compliance for franchise agreements and how franchisees can manage their obligations efficiently, especially using inventory management software.
1. GST Registration for Franchisees
For most franchisees, registering for GST is a prerequisite to guaranteeing compliance. According to the most recent information, every company that generates ₹20 lakh in revenue annually (₹10 lakh in special category states) must register for GST. Nonetheless, optional registration is an option that may be helpful for claiming input tax credits (ITC) even if you are below this threshold.
Key Points to Keep in Mind:
- GSTIN Requirement: Every franchisee needs a GST Identification Number (GSTIN) to operate under the GST framework.
- Taxpayer Types: There are different types of taxpayers based on turnover, such as regular taxpayers, composition scheme taxpayers, and others. Understanding which category applies to you is essential.
- Interlinking with the Franchisor: Franchisees typically have to deal with GST on both their purchases (goods and services) and sales. Ensure your franchisor provides guidance on how to handle GST, especially when there are shared responsibilities.
You can easily manage GST registration and track your GST-related obligations using CaptainBiz, automatically generating the necessary documents and ensuring compliance.
2. Understanding GST on Franchise Fees
Franchise agreements typically involve paying an upfront franchise fee, which is taxable under GST. This fee is paid in exchange for the right to operate the franchise, use the brand, and receive ongoing support from the franchisor.
Key Considerations:
- GST Rate on Franchise Fees: The GST rate applicable to franchise fees is typically 18%. However, consulting your franchise agreement for the exact terms is crucial, as some franchisors might pass on this fee at a reduced rate.
- GST on Royalties: Ongoing royalty fees paid to the franchisor, often calculated as a percentage of the revenue, are also subject to GST at 18%.
- Invoice Generation: Use software to generate franchise fees and royalties invoices. This ensures that you comply with GST laws by issuing proper invoices, which is crucial for claiming input tax credits and avoiding disputes.
3. GST on Products and Services Offered by the Franchise
Franchisees are often involved in selling products or services, and each sale needs to be handled concerning GST. The type of goods or services you sell will determine the GST rate applicable to each product. It is essential to differentiate between various product categories, such as food, electronics, or clothing, as GST rates vary accordingly.
Key Points to Consider:
- Product Classification: Ensure the correct classification of products and services under the GST Act. This helps in applying the appropriate GST rate.
- Input Tax Credit (ITC): You can claim input tax credit on goods and services purchased for the business, reducing your GST liability. Keep records of all purchases and sales to ensure you are eligible for these credits.
- GST Filing: Franchisees must file monthly GST returns, reporting both the taxes collected from customers and the taxes paid on purchases. Using GST reports to track and prepare your returns will simplify this process significantly.
For detailed tracking and reporting of your GST obligations, GST reports provide an efficient solution to stay on top of your compliance tasks.
4. E-Invoicing for Franchisees
In 2025, e-invoicing is becoming a standard practice for businesses with turnover exceeding ₹5 crore. This is designed to reduce fraudulent claims and make the process more transparent. Franchisees, especially those dealing with large volumes, must ensure that they implement e-invoicing as part of their GST compliance strategy.
Benefits of E-Invoicing:
- Efficiency: E-invoicing automates the process, reducing the manual effort required to generate and store invoices.
- Tax Credit Compliance: It ensures that the tax credit claimed by the franchisee is validated by the GST Network (GSTN).
- Integration with Software: Most CaptainBiz solutions offer e-invoicing features, making it easier to comply with these new regulations.
Franchisees can generate and share e-invoices to ensure their operations align with the latest GST guidelines. This seamless process ensures that your invoicing complies with GST standards and makes your workflow much more efficient.
5. Record-Keeping and GST Compliance
One of the most critical aspects of GST compliance is maintaining accurate records. As a franchisee, you will need to keep track of your sales, purchases, GST payments, input tax credits, and any other documents related to your franchise operations.
What You Need to Keep:
- Sales and Purchase Invoices: Keep a record of all sales and purchase invoices, including those involving the franchisor.
- GST Returns: Ensure that all GST returns are filed on time and that records are updated regularly.
- Supporting Documents: Retain all documents that support your GST claims, such as contracts, payment receipts, and other agreements related to your franchise operations.
Inventory Management: Tools like inventory management software can help you track stock and ensure that your business remains efficient. Proper inventory management is essential for accurate GST reporting, as stock movement affects both input tax credit claims and final GST payments.
6. Penalties for Non-Compliance
Failure to comply with GST regulations can lead to penalties, interest charges, and legal issues. Some of the common penalties include:
- Late Filing Fees: Penalties for late filing of GST returns.
- Incorrect Claims: If the franchisee claims input tax credits incorrectly, the GST department may levy a penalty.
- E-Invoicing Violations: Non-compliance with e-invoicing requirements may also result in penalties.
To avoid these penalties, it’s crucial to maintain accurate records and ensure that you file returns and generate invoices on time. Using automated tools can help you avoid errors and reduce the risk of penalties.
Also Read: Know About Franchise Business for 2025 GST, Process, Taxation
Frequently Asked Questions (FAQs)
What is the GST registration threshold for a franchisee?
The GST registration threshold for a franchisee is ₹20 lakh for most states and ₹10 lakh for special category states. If your annual turnover exceeds these limits, you are required to register for GST.
What GST rate applies to franchise fees and royalties?
Franchise fees and royalties are subject to an 18% GST rate.
What is e-invoicing, and is it mandatory for franchisees?
E-invoicing is a process where invoices are generated electronically and submitted to the GSTN for validation. It is mandatory for businesses with a turnover exceeding ₹5 crore.
Can I claim input tax credit for GST paid on purchases?
Yes, franchisees can claim input tax credit for GST paid on purchases related to their business, provided the transactions are properly documented and compliant with GST laws.
How can I calculate GST for my franchise sales?
You can use the GST calculator to quickly determine the applicable GST on your sales and purchases. This can help you streamline your calculations and ensure accuracy in your filings.
Can I manage my billing and GST compliance through an app?
You can download the Billing App to help you generate invoices, track sales, and stay on top of your GST compliance, all from your mobile device.
