The Directorate General of Goods and Services Tax Intelligence (DGGI) has issued show cause notices to over a dozen food and beverage companies regarding͏͏ trademark͏͏ usage͏͏ by͏͏ their͏͏ franchises͏͏ and͏͏ outlets͏͏ in͏͏ states͏͏ where͏͏ they͏͏ do͏͏ not͏͏ have͏͏ registered͏͏ offices,͏͏ according͏͏ to͏͏ informed͏͏ sources.
INR͏͏ 3,000͏͏ Crore͏͏ Demand:
The͏͏ notices,͏͏ issued͏͏ in͏͏ the͏͏ first͏͏ week͏͏ of͏͏ August,͏͏ demand͏͏ approximately͏͏ INR͏͏ 3,000͏͏ crore͏͏ from͏͏ the͏͏ companies͏͏ for͏͏ the͏͏ period͏͏ beginning͏͏ July͏͏ 2017,͏͏ when͏͏ GST͏͏ was͏͏ introduced.͏͏ The͏͏ DGGI͏͏ states͏͏ that͏͏ franchises͏͏ and͏͏ outlets͏͏ located͏͏ outside͏͏ the͏͏ companies’͏͏ home͏͏ states͏͏ are͏͏ registered͏͏ separately͏͏ and͏͏ are͏͏ thus͏͏ obligated͏͏ to͏͏ pay͏͏ GST͏͏ on͏͏ trademark͏͏ usage.͏͏ “Tax͏͏ must͏͏ be͏͏ paid͏͏ for͏͏ the͏͏ use͏͏ of͏͏ trademark͏͏ services,”͏͏ a͏͏ senior͏͏ official͏͏ stated.
Although͏͏ the͏͏ franchise͏͏ holders͏͏ and͏͏ vendors͏͏ were͏͏ paying͏͏ fees͏͏ to͏͏ the͏͏ companies͏͏ for͏͏ brand͏͏ usage,͏͏ they͏͏ were͏͏ not͏͏ paying͏͏ GST͏͏ on͏͏ those͏͏ fees.
Continue͏͏ Exploring:͏͏ Investor͏͏ appetite͏͏ grows͏͏ for͏͏ homegrown͏͏ food and beverage startups͏͏ as͏͏ demand͏͏ skyrockets
Tax͏͏ Authorities͏͏ Classify͏͏ Brand͏͏ Use͏͏ as͏͏ Taxable͏͏ Supply:
As͏͏ per͏͏ Schedule͏͏ 1,͏͏ Entry͏͏ 2͏͏ of͏͏ the͏͏ Central͏͏ GST͏͏ legislation,͏͏ the͏͏ supply͏͏ of͏͏ goods͏͏ or͏͏ services͏͏ between͏͏ distinct͏͏ persons͏͏ (different͏͏ registrations͏͏ of͏͏ a͏͏ legal͏͏ entity)͏͏ is͏͏ regarded͏͏ as͏͏ a͏͏ taxable͏͏ supply,͏͏ even͏͏ if͏͏ provided͏͏ at͏͏ no͏͏ charge.
This͏͏ has͏͏ prompted͏͏ tax͏͏ authorities͏͏ to͏͏ classify͏͏ the͏͏ use͏͏ of͏͏ a͏͏ brand͏͏ by͏͏ a͏͏ branch͏͏ office͏͏ or͏͏ franchise͏͏ holder͏͏ in͏͏ a͏͏ different͏͏ state͏͏ as͏͏ a͏͏ service͏͏ provided͏͏ by͏͏ the͏͏ head͏͏ office.
“If͏͏ this͏͏ interpretation͏͏ is͏͏ adopted,͏͏ it͏͏ would͏͏ place͏͏ a͏͏ significant͏͏ burden͏͏ on͏͏ businesses͏͏ operating͏͏ across͏͏ multiple͏͏ jurisdictions,”͏͏ said͏͏ Saurabh͏͏ Agarwal,͏͏ a͏͏ partner͏͏ at͏͏ professional͏͏ services͏͏ network͏͏ EY.
Agarwal͏͏ added͏͏ that͏͏ it͏͏ could͏͏ also͏͏ result͏͏ in͏͏ excessive͏͏ additional͏͏ tax͏͏ costs͏͏ for͏͏ businesses͏͏ where͏͏ full͏͏ input͏͏ tax͏͏ credit͏͏ is͏͏ not͏͏ available.
The͏͏ GST͏͏ rate͏͏ is͏͏ set͏͏ at͏͏ 5%͏͏ for͏͏ non-air-conditioned͏͏ restaurants͏͏ and͏͏ 18%͏͏ for͏͏ air-conditioned͏͏ ones.͏͏ Restaurants͏͏ serving͏͏ alcoholic͏͏ beverages͏͏ are͏͏ also͏͏ subject͏͏ to͏͏ an͏͏ 18%͏͏ GST.
Experts͏͏ suggest͏͏ that͏͏ this͏͏ development͏͏ could͏͏ heighten͏͏ tax͏͏ complexities͏͏ for͏͏ the͏͏ industry͏͏ and͏͏ increase͏͏ their͏͏ tax͏͏ burden.
“The͏͏ main͏͏ issue͏͏ is͏͏ the͏͏ lack͏͏ of͏͏ a͏͏ formal͏͏ contractual͏͏ relationship͏͏ with͏͏ a͏͏ registered͏͏ place͏͏ of͏͏ business͏͏ in͏͏ another͏͏ state͏͏ for͏͏ the͏͏ supply͏͏ of͏͏ a͏͏ trademark͏͏ to͏͏ a͏͏ distinct͏͏ entity.͏͏ Without͏͏ such͏͏ a͏͏ contractual͏͏ relationship,͏͏ the͏͏ activity͏͏ is͏͏ not͏͏ subject͏͏ to͏͏ GST,”͏͏ explained͏͏ Abhishek͏͏ A͏͏ Rastogi,͏͏ founder͏͏ of͏͏ Rastogi͏͏ Chambers.
He͏͏ stated͏͏ that͏͏ there͏͏ is͏͏ a͏͏ clear͏͏ distinction͏͏ between͏͏ using͏͏ a͏͏ logo͏͏ for͏͏ identification͏͏ purposes͏͏ and͏͏ its͏͏ commercial͏͏ use͏͏ under͏͏ trademark͏͏ law.
