Franchise Model: Enter India Without Your Own Entity

Why the Franchise Model Is a Viable India Entry Strategy

India has no dedicated franchise law: franchising operates under a patchwork of existing statutes — the Indian Contract Act 1872, the Trade Marks Act 1999, the Copyright Act 1957, the Competition Act 2002, FEMA 1999, and the Income-tax Act 2025 (which replaced the Income-tax Act 1961 with effect from 1 April 2026) — with no mandatory franchise registration, no prescribed disclosure document, and no government approval required to sign a franchise agreement with an Indian counterpart. That gap lets a foreign franchisor grant an Indian party the right to use its brand, systems, and intellectual property — collecting royalties and fees — without incorporating a single entity on Indian soil.

This matters because India is one of the world's largest consumer markets, yet establishing a wholly owned subsidiary or branch office involves significant capital commitment, regulatory compliance, and operational risk — all of which the franchise model sidesteps.

That said, the absence of regulation does not mean the absence of complexity. Royalty payments flowing from India to a foreign franchisor attract withholding tax under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961). Trademark licensing must be documented to avoid disputes. And the franchise agreement itself must be crafted to survive challenges under Indian contract law, which does not recognise post-term non-compete clauses that amount to a restraint of trade.

Franchise Structures Available to Foreign Companies

Direct Franchise

In a direct franchise arrangement, the foreign franchisor contracts directly with individual Indian franchisees. The franchisor retains maximum control over brand standards, pricing, and operations. This model works well when the franchisor has the bandwidth to manage multiple relationships across India and can handle compliance from abroad.

However, managing dozens of individual franchisees across Indian states — each with different local regulations, consumer preferences, and commercial environments — can become unwieldy. Direct franchising is best suited for brands entering with a small footprint of 3 to 10 outlets in a single city or region.

Master Franchise

The master franchise model is the most popular structure for foreign brands entering India. The franchisor appoints a single Indian entity as the master franchisee, granting exclusive rights to develop the brand across a defined territory — typically the entire country or a large region. The master franchisee acts as a mini-franchisor: recruiting sub-franchisees, enforcing brand standards, and managing day-to-day operations.

This model dramatically reduces the franchisor's operational burden. The master franchisee handles local compliance, real estate, staffing, and sub-franchisee management. The franchisor's role shifts to brand oversight, training, and quality control. International brands like Subway and Domino's have used this structure to build large Indian networks without establishing their own operating entities.

Area Development Franchise

An area development agreement grants a single franchisee the right to open multiple outlets within a defined geographic area over a specified timeline. Unlike the master franchise, the area developer does not have the right to sub-franchise — they must own and operate all outlets themselves.

This model is suited for capital-rich Indian partners who want to control an entire region. It gives the franchisor more consistency in operations (since one entity runs all outlets) while still avoiding the need for a local entity.

Joint Venture Franchise

Some foreign brands enter India through a joint venture with an Indian partner, where the JV entity becomes the franchisee. While this technically involves creating an Indian entity, the foreign brand shares the investment and risk with the local partner. The JV model is common in sectors where local market knowledge is critical — food service, retail, and hospitality.

Note that if the foreign franchisor takes an equity stake in the Indian JV entity, FDI regulations apply. The investment must comply with the automatic route or government approval route depending on the sector, and FC-GPR filings with the RBI are mandatory.

FEMA and RBI Compliance for Franchise Royalties

When an Indian franchisee pays royalties or franchise fees to a foreign franchisor, these payments constitute current account transactions under FEMA. The good news: since December 2009, the RBI has removed all caps on royalty payments under the automatic route. There is no ceiling on what an Indian franchisee can pay to a foreign franchisor for trademark use, technical know-how, or franchise fees.

However, certain compliance requirements apply:

• Authorised Dealer Bank: All outward remittances must be routed through an authorised dealer (AD) bank. The franchisee's bank will verify that the payment conforms to FEMA regulations before processing the remittance.
• Form 145 (formerly Form 15CA) and Form 146 (formerly Form 15CB): The franchisee files Form 145 (an online declaration) for the remittance itself. Form 146, a chartered accountant's certificate, is required only for Part C of Form 145 — a taxable remittance where the aggregate exceeds INR 5 lakh in the tax year and no assessing officer's certificate has been obtained. Below that threshold, Part A of Form 145 is filed without a Form 146.
• Purpose Code: The remittance must be tagged with the correct RBI purpose code from the balance-of-payments code list — franchise fees and trademark royalties sit in the "charges for the use of intellectual property" group. Confirm the exact code with the AD bank before each remittance; the wrong code is itself a FEMA reporting defect.
• No Prior RBI Approval: Since these are current account transactions under the automatic route, no prior RBI approval is needed. The AD bank processes the payment directly.

Tax Implications: Withholding Tax on Franchise Payments

This is where most foreign franchisors need to pay close attention. Every payment from an Indian franchisee to a non-resident franchisor is subject to tax deduction at source under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), where the payment is chargeable to tax in India.

Domestic Withholding Tax Rates

Under Indian domestic law, the tax on royalties and fees for technical services paid to non-residents is 20% (plus applicable surcharge and cess), now in section 207(2) of the Income-tax Act, 2025 (Table, Sl. Nos. 1 and 2; section 115A of the Income-tax Act, 1961). The Finance Act 2023 set that rate with effect from 1 April 2023, doubling the previous 10% domestic rate. A lower rate is available only where the payment qualifies for benefit under an applicable DTAA.

DTAA Benefits

India has Double Taxation Avoidance Agreements with more than 90 countries. If the franchisor's home country has a DTAA with India, the withholding tax rate may be reduced. Key treaty rates for royalties include:

A franchise royalty is a trademark and know-how royalty, so it takes the general tier of each treaty, never the equipment tier. To claim DTAA benefits, the non-resident franchisor must provide a valid Tax Residency Certificate (TRC) issued by its own home tax authority, along with a self-declaration in Form 41 (formerly Form 10F). Without these documents, the Indian franchisee must deduct TDS at the higher domestic rate.

The franchisor should also be aware that royalty and fees for technical services under India's DTAAs have specific definitions. Franchise fees, lump-sum payments, and ongoing royalties may be classified differently depending on the treaty language.

GST on Imported Services

When the franchisor is located outside India and the franchisee is in India, the franchise services are treated as an import of services. The Indian franchisee must pay GST at 18% under the reverse charge mechanism. This GST is in addition to the withholding tax — but the franchisee can typically claim input tax credit on the GST paid, offsetting it against their output GST liability.

Trademark and IP Licensing: Protecting Your Brand

The franchise model is fundamentally an intellectual property licensing arrangement. The franchisor licenses its trademarks, trade dress, operational systems, and know-how to the franchisee. Protecting these assets in India requires specific steps.

Register Your Trademark in India

Before granting franchise rights, the foreign franchisor should register its trademark with the Indian Trade Marks Registry. India follows the Madrid Protocol, so if the franchisor already has an international trademark registration, it can designate India through the Madrid system. Alternatively, a direct application can be filed with the Indian registry.

Trademark registration in India typically takes 12 to 18 months from filing to registration, though the mark receives protection from the filing date. The official fee for an e-filed TM-A application is INR 9,000 per class for a company; the concessional INR 4,500 rate applies only to an individual, startup or small enterprise (First Schedule, Trade Marks Rules 2017).

Registered User Filing

Under the Trade Marks Act 1999, when a trademark owner licenses its mark to another party, the licensee should be recorded as a registered user with the Trade Marks Registry. While this filing is not mandatory, it strengthens the franchisor's position in any trademark dispute and prevents the argument that the franchisee's use of the mark constitutes uncontrolled licensing (which can be grounds for cancellation).

Key IP Clauses in the Franchise Agreement

The franchise agreement must clearly address:

• Scope of license: Specify which trademarks, copyrights, and know-how are being licensed, whether the license is exclusive or non-exclusive, and the geographic territory.
• Quality control: The franchisor must retain the right to enforce brand standards. Indian trademark law requires that the licensor maintain quality control over the licensee's use of the mark.
• Termination and IP reversion: Upon termination, all IP rights must revert immediately to the franchisor. The franchisee must cease using all trademarks, trade names, and proprietary systems.
• Non-compete limitations: Indian courts have historically struck down post-term non-compete clauses under Section 27 of the Indian Contract Act, which prohibits restraint of trade. In-term non-compete clauses are enforceable if reasonable.

Structuring the Franchise Agreement for India

A well-drafted franchise agreement is the foundation of a successful India entry. Key provisions to include:

Financial Terms

• Initial franchise fee: A one-time lump sum, sized against the brand's strength and the territory granted. There is no published Indian benchmark and no franchise disclosure law that would create one, so the number is negotiated.
• Ongoing royalty: A percentage of gross revenue, paid monthly or quarterly. Fix the definition of "gross revenue" precisely — whether it is net of GST, discounts and returns — because that definition moves more money than the percentage does.
• Marketing fund contribution: A separate percentage of gross revenue ring-fenced for national or regional advertising, with an obligation on the franchisor to account for how the fund is spent.
• Minimum performance targets: Number of outlets to be opened within defined timelines, minimum revenue thresholds, and quality benchmarks.

Governing Law and Dispute Resolution

Foreign franchisors often prefer their home country's law to govern the agreement. However, Indian courts will apply Indian law to matters involving Indian property, Indian trademarks, and Indian consumer protection — regardless of the contractual choice of law. A balanced approach is to choose Indian law as the governing law and include an arbitration clause with a neutral seat (Singapore is popular for India-related disputes).

The Arbitration and Conciliation Act 1996 governs arbitration in India, and Indian courts generally enforce international arbitral awards under the New York Convention.

Termination Rights

Indian franchisees have occasionally challenged termination clauses in court. To protect the franchisor's interests:

• Include clear, objective grounds for termination (material breach, failure to meet performance targets, insolvency).
• Provide a reasonable cure period (typically 30 to 90 days) before termination takes effect.
• Address the consequences of termination: IP reversion, de-identification of outlets, inventory handling, and employee transition.

Sector-Specific Considerations

Food and Beverage

India's food service sector requires FSSAI (Food Safety and Standards Authority of India) licensing. The Indian franchisee must obtain the FSSAI license — the foreign franchisor does not need one. Menu localisation is critical: most successful international food franchises in India have adapted their menus for local tastes and dietary preferences.

Retail

Foreign brands entering India's retail sector through franchising can avoid the FDI restrictions that apply to multi-brand retail trading (foreign ownership up to 51%, and only through the government approval route). Since the foreign franchisor does not own the Indian retail entity, these caps do not apply to a pure franchise arrangement.

Education and Training

Education franchises must comply with sector-specific regulations, including approvals from AICTE (technical education), UGC (higher education), or state education boards. The Indian franchisee bears the burden of obtaining these approvals.

Healthcare and Wellness

Healthcare franchises are licensed mostly at state level: a clinic or diagnostic centre registers under the state's clinical establishments legislation, and a pharmacy needs a retail drug licence from the State Licensing Authority. CDSCO (Central Drugs Standard Control Organisation) enters the picture only where drugs or medical devices are imported or manufactured. Strict regulations govern the practice of medicine, and the Indian franchisee must ensure all practitioners hold valid Indian medical registrations.

Costs: Franchise Model vs. Setting Up an Entity

One of the primary advantages of the franchise model is cost avoidance. Here is a comparative breakdown:

The franchisor's primary costs are legal fees for drafting the franchise agreement, trademark registration costs (INR 9,000 per class in official fees for a corporate applicant, plus attorney fees), and ongoing monitoring of the franchisee's operations.

Due Diligence: Selecting the Right Indian Franchise Partner

The success of your India franchise operation hinges on selecting the right local partner. Unlike markets with established franchise disclosure laws, India places the entire burden of due diligence on the franchisor. Key steps include:

Financial Due Diligence

Verify the prospective franchisee's financial capacity to fund the initial investment and sustain operations through the break-even period, which for a new outlet is measured in years rather than months. Request audited financial statements for the last 3 years, bank references, and proof of funds. For master franchise arrangements where the partner will sub-franchise, assess their ability to fund the rollout of multiple locations.

Operational Capability

Evaluate whether the prospective partner has experience in the relevant industry, access to suitable real estate, and a management team capable of executing the franchise playbook. India's retail real estate market is highly fragmented, and securing the right locations requires deep local knowledge and relationships with landlords and mall operators.

Legal and Regulatory Background

Conduct background checks through the MCA portal (for company filings and director disqualifications), CIBIL (credit history), and litigation databases. Verify that the prospective franchisee has no pending regulatory actions, tax disputes, or criminal proceedings that could affect the franchise operation.

Common Pitfalls and How to Avoid Them

• Not registering the trademark first: Entering India without a registered trademark exposes the franchisor to trademark squatting, where a third party registers the brand name before the legitimate owner.
• Ignoring withholding tax obligations: If the Indian franchisee fails to deduct TDS, the Indian tax authorities can disallow the expense deduction and assess penalties. The franchisor should contractually require the franchisee to comply with all tax obligations.
• Overlooking GST reverse charge: Many foreign franchisors are surprised to learn that their Indian franchisees must pay 18% GST on franchise fees and royalties as an import of services.
• Unenforceable non-competes: Post-term non-compete clauses are generally unenforceable in India. Instead, focus on strong confidentiality clauses and IP protection provisions.
• No exit strategy: The franchise agreement must address what happens when the relationship ends — de-identification timelines, inventory buy-back, employee handling, and data return.

Key Takeaways

• Foreign companies can enter India through a franchise model without incorporating any Indian entity — the master franchise model is the most popular and proven structure.
• There is no franchise-specific law in India and no mandatory registration or disclosure requirement for franchise agreements.
• Royalty payments to the foreign franchisor attract 20% withholding tax under domestic law — section 207(2) of the Income-tax Act, 2025 (Table, Sl. Nos. 1 and 2; section 115A of the Income-tax Act, 1961) — or the applicable lower DTAA rate, subject to a TRC and Form 41, plus 18% GST under reverse charge on the Indian franchisee.
• Register your trademark in India before granting franchise rights — trademark squatting is a real risk.
• The franchise model avoids the recurring cost base of an Indian entity altogether — no incorporation, no registered office, no resident director, no annual ROC and audit cycle, and no wind-up process on exit.
• Choose professional advisory for structuring the agreement, trademark filing, and cross-border tax planning.