DGGI Issues Notices to over 12 Leading Food & Beverage Brands for Trademark Violations.
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More than a dozen food and beverage companies have received show-cause notifications from the Directorate General of Goods and Services Tax Intelligence (DGGI) about trademark usage by their franchises and outlets in states other than their registered offices, officials said.
The notifications, which were received in early August, ask the corporations for ₹3,000 crore in total, covering the period beginning in July 2017—the month that the GST was implemented.
The DGGI’s position that franchisees and stores outside the states in which the corporations are based are registered as separate entities is the source of the dispute.
These organizations are required to pay taxes on the use of trademarks and brand services in accordance with the GST structure.
A senior official explained, “Tax has to be paid for the use of trademark services, even if there is no monetary exchange between these branches and the parent companies.”
GST was not imposed to these transactions, even though franchise holders were paying fees to the parent firms for the use of their brands.
Supplies of goods or services between various persons—different registrations of the same legal entity—are taxed under the Central GST legislation (Schedule 1, Entry 2) even in the absence of a monetary exchange.
Tax authorities argue that a franchise or branch operating in another state that uses the trademark is offering a service that is rendered by the corporate headquarters.
Industry experts caution that this approach would greatly raise the costs associated with compliance for companies that operate in several jurisdictions.
The GST rate is now 5% for restaurants without air conditioning and increases to 18% for those with air conditioning.
Additionally, restaurants that serve alcohol are liable to the 18% GST charge.
These notifications are being sent at a time when the food and beverage sector is already battling the difficulties posed by a tiered tax structure.
Experts warn that businesses who are unable to obtain the entire input tax credit may face additional tax liabilities if brand utilization is classified as a taxable service.
The lack of official trademark usage agreements between the main office and other state-based franchises makes matters more complicated because the activity might not be considered a taxable supply.
It is expected that the action will greatly raise the tax liabilities of impacted companies, which could result in increased expenses and additional legal troubles for the food and beverage industry.