Buying a Foreign-Brand Franchise in India: Check Overseas Payments

When buying a foreign-brand franchise in India, the fees set out in the agreement are not your total cost. Exchange rates, bank charges and tax provisions can change the amount you actually pay in rupees. Before signing, prospective franchisees should understand who will receive each payment, which currency it will be paid in and what supporting documents are required. Make these checks part of your purchasing decision rather than leaving them entirely to your accountant.

1. Identify the payment recipient and currency

First, ask the brand for a list of all overseas payments. This should separately identify the initial franchise fee, ongoing brand fees, technical support charges and payments for other services. For each item, ask for the recipient’s legal name, country, currency and payment date.

If the contracting entity and the payment recipient are different, check why and confirm the recipient’s authority to receive payment. An invoice from an associated company is not necessarily a problem, but the relationship should be clear in the agreement, invoice and bank instructions. Do not send money to a new bank account solely on the basis of an email; verify the details independently with an authorised contact.

Get written answers to these questions:

• Is the fee fixed in a foreign currency or in rupees?
• Which date and exchange rate will be used to calculate the rupee amount?
• Who pays the charges levied by the sending, intermediary and receiving banks?
• Is payment considered complete when the money leaves your account or when the recipient receives it?

If an Indian representative will collect the money, confirm that paying them will discharge the corresponding obligation to the overseas franchisor.

2. Understand the rupee cost and tax responsibilities

A fee fixed in a foreign currency does not remain fixed in rupees. A budget based on today’s exchange rate may not cover future payments. In your financial plan, calculate payments using several possible exchange rates. Treat these as risk scenarios, not forecasts.

Keep the base fee, currency conversion margin, bank charges and applicable taxes separate in your cost schedule. Ask the bank for its actual conversion rate and charges; do not budget solely on the reference rate shown online. If regular payments will continue over a long period, ask the bank about available currency risk management options and their costs.

Payments to an overseas recipient may be subject to withholding tax under the applicable income tax rules. The nature of the payment, the recipient’s tax residence and any applicable double taxation agreement can affect the outcome. It is therefore inappropriate to assume that the same rate applies to every overseas payment.

Pay particular attention to any clause requiring the franchisor to receive the full agreed amount even after tax has been withheld. Such a clause may oblige you to bear an additional cost. Ask a tax adviser to calculate its effect. Separately check the Goods and Services Tax (GST) applicable to imported services and your eligibility for input tax credits; do not treat a tax credit as an immediate cash refund.

3. Check Indian rules and bank procedures in advance

India has no dedicated national franchise law or mandatory franchise-specific pre-sale disclosure regime. Nor is separate central franchise registration mandatory for granting franchises. This does not mean that overseas payments are exempt from regulation.

The Indian Contract Act, 1872 provides the principal legal framework for agreements, free consent, performance and breach. The Foreign Exchange Management Act, 1999 and the applicable rules under it are relevant to cross-border payments. The Reserve Bank of India administers the foreign exchange regime, and payments are generally made through an authorised bank. Tax laws and other general business laws also remain applicable.

Under the generally permitted arrangements, remitting franchise fees or royalties to an overseas franchisor does not usually require separate prior approval from the Reserve Bank of India. Nevertheless, the payment purpose, applicable conditions and documentation must be checked. Do not interpret this as blanket permission for every type of cross-border transaction.

Before signing, show your bank the proposed agreement and payment details. Ask which invoices, payment-purpose information, tax details and, where applicable, certificates it requires. Also set out in writing the overseas brand’s responsibility to supply the necessary documents.

4. Address documentation delays in the agreement

Suppose a payment is due, but the franchisor has not supplied a correct invoice or the required tax residency documentation. The bank cannot complete its checks, yet the agreement treats non-receipt of payment as your breach. To prevent this situation, link the deadlines for supplying documents to the payment deadlines.

Propose contractual provisions covering how delays caused by missing or inadequate franchisor documentation will be resolved, who must be notified and how much time will be allowed to remedy the issue. Where bank checks are beyond your control, also seek a provision allowing evidence of your attempt to make payment to be accepted. These rights do not arise automatically; they must be agreed and recorded in writing.

Practical takeaway: Before making your first payment to an overseas brand, clarify the recipient, currency, tax burden and bank documentation. Have your bank, tax adviser and lawyer review the same payment arrangements so that you can fulfil the obligations you agree to.