WALKING ON EGGSHELLS IN INDIA: Tips for franchisors considering a move into the Indian market.

Author:Anand, Safir
 
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Stalwarts in the industry peg the size of the franchise sector in India at an estimated US$47 billion-$48 billion. A simple road trip on a major highway in the country shows the presence of popular restaurants that, up until sometime ago, could only be accessed internationally. The demand in consumption of such foreign brands is not just a reflection of the urban economy but a large part of this demand is being led by the population in Tier-2 and Tier-3 cities despite the differences in consumer profile. It is no surprise that India, in recent times, has seen a boom in the number of foreign players.

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This "urbanization" is exposing the population at increasing rates to newer business models, product categories and brands in India, leading to greater brand consciousness. Instead of buying a meal from an unfamiliar roadside restaurant, the consumer now can choose a popular international eatery in the same vicinity. This change has resulted in a better ambience, better service, better quality of food and newer experiences for the consumer. The ability to consume a "brand" is a big driving force since it creates an aspiration for the consumer, and once met, validates inclusivity with the rest of the progressive world.

This trend is not limited to the food and beverage industry and is identifiable within a majority of the sectors. One of the big reasons for this is the energy and high demand of the new-age Indian entrepreneur. Indian entrepreneurs no longer compete in just their own country but are lunging for a chunk of the foreign pie, which once was out of reach. And the government is taking appropriate steps to ensure that foreign brands find it easier to develop a footing in India.

The Income Tax Appellate Tribunal gave relief to foreign franchisors in 2018 when it ruled that Domino's Pizza is a U.S. company and cannot be subjected to Indian taxes. The controversy arose when the tax officer alleged that the Permanent Establishment rule required that Domino's Pizza be taxed at 40 percent instead of the 10 percent typically required on royalties through the Double Tax Avoidance Agreement between India and the U.S. The Tribunal held that Jubilant Foodworks (master franchisee of Domino's) cannot be considered a permanent establishment for Domino's Pizza in India.

For a typical franchisor looking to enter the Indian market, the most relevant company structure is either a private limited company or a limited liability partnership...

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