Gaurav Marya, President, Franchise India Holdings Ltd. He is a born entrepreneur and started his first Business at the age of 16. Over the years he has started and sold some 15 other businesses ranging from mobile phones, career advisory, restaurants to entertainment Business etc. It was not until the age of 24, that Gaurav discovered his real passion in life — Franchising. In 1999, Mr. Marya formed his own company. Today he is widely credited for causing the franchise revolution in India. He is the visionary force behind the India’s largest integrated franchise and retail solution company Franchise India Holdings Ltd.
Franchise India Holdings Ltd. is a banner that encompasses a variety of domestic and international portfolio of franchise and retail companies apart from offering Franchise and Retail consulting. Under Mr. Marya’s leadership, Franchise India Holdings Ltd. has moved from strength to strength and is well acknowledged for revolutionizing the way companies plan the course of their Business Development. The company has consulted over 250 large and small corporations in making informed decisions about their Business Growth, including Gitanjali Group, Emami, Videocon, Landmark Group, Tata Steel, Unilever India, Levis and Welspun amongst others.
In an exclusive interaction with Hemant P. Maradia of India Infoline, Mr. Marya says, “Franchising is growing at the rate of 30-35% annually. We have only still touched the tip of ice berg.”
Give us a sense of the big opportunities and trends that are emerging for franchising in India?
Franchising is still in its early stages in India, and has become increasingly popular as a means of doing business in the past few years, both in terms of international franchises and domestic ones. Franchising is growing at the rate of 30-35% annually. Certainly, franchising has been regarded as organizer of Small Businesses. Its effect on retail and service pays business comes across as a huge opportunity. Franchising is considered a popular method of doing business within India with the franchisor granting numerous unit franchises in a wide range of areas. This has been the case in respect of education, closely followed by retail.
We have only still touched the tip of ice berg. In times to come, most consumers based business will be looking to reach the depth and breadth of India using the franchising methodology as it brings about more efficiency on talent, capital and property.
The Big corporate groups particularly FMCG companies will also perk up their portfolio to add service based categories; more so in companies where products have exhausted their penetration at POS. Franchising will be important in dissemination of these services.
What are the big impediments to growth for the franchising space in India?
Absence of proper franchising laws, formal funding policies and lack of clarity in franchise taxation are a few of the hurdles in the way of franchising growth in India.Lack of Franchise Laws: Due to absence of any franchising laws or any Government guidelines in India, franchisors tend to follow formats which are approved or followed in other countries. Also, it is seen that most of the times the franchisees do not have much bargaining/negotiating capacity in front of the giant franchisors. In view of the circumstance, it may be advisable if the Government frames certain guidelines taking care of the needs and concerns of both the franchisors and franchisees.
Lack Of Franchise Funding Programme: the mechanism for financing the franchise formats has not evolved, as the banks don’t render industry specific funding options to Brand franchisees and often treat them at par with independent start-up business, which is not the case as the brand has already proven itself in the market and from Bank’s perspective, giving a loan to franchisee is much safer then giving it to a stand alone business. Currently, No more than five per cent of the entire franchise financing requirement in India is met by financial institutions.
Dual Taxation: The implementation triggers a lot of impact on the operationalisation of the format. Today, Indian franchisor is subjected to dual taxation of service tax and sales tax. Product franchising is a mode of product distribution. Therefore, from cost price to sales price, there is VAT applicability. At the same time, franchisors are liable to pay service tax on franchise service given to the franchisee. The final burden of these taxes is passed on by franchisor to the franchisee.
Certainly, the vehicle that would put the industry on greater growth is lacking. The business practice that emerges further complicates the franchisee-franchisor relationship and also makes the legal framework more tedious.
How is the Indian franchise scenario different from some of the matured markets? What needs to be done to bolster its growth in India?
Franchising is still an emerging trend in India. It is still growing and as such, most of efforts by Indian franchisors are still inclined to franchise recruitment and sales unlike in the West where franchise management and ensuring franchisee profitability is the matter of greater concern.
Though we are in franchise growth trajectory in India, the systems will grow sizable in the next few years. The greatest need perceived would be for franchise laws to resolve the disputes arising in the between principals and franchisees. It would be also pertinent for the Government to ease borrowing for franchise players interested to open outlets for international players in India. For the franchise industry to thrive successfully, it would require the abolition of service tax currently levied on transportation, rent and commission.
How important is the industry status for franchising?
Only once the franchise industry achieves the industry status in India, It would attract best talent and professionals and HR would be more tending to join the industry. Banks will be more inclined to give franchisee funds and loans. Mall Developers would also be willing to give more importance to tri-party arrangements for properties including franchisors and franchisees. High caliber people would join the industry as franchisees when there is enough knowledge on the subject and there is a thriving market. More importantly franchising would be able to establish its strong suit to enable self employment and students, women, both retired and young professionals will begin to take it up seriously as a route to start business.
There are a whole host of taxation issues plaguing the franchise industry? Could you briefly give an idea about the same and also tell us what are the remedies?
While India has no specific legislation regulating franchise arrangements, there are a number of laws that affect the franchisor-franchisee relationship. Intellectual property, taxation, labor, competition, property and exchange control regulations all influence franchising. Home to over a billion people, India offers vast openings for a franchisor to set up business create product/service awareness and exploit the enormous market offered. A combination of various factors has led to this situation, including the Government of India's policy, restricting foreign investment in certain sectors, while freely permitting franchising arrangements with Indian parties.
Unlike countries with a developed system relating to franchising, the absence of specific regulations or guidelines, coupled with the applicability of several laws, do pose a number of challenges for foreign franchisors. However, the present ambiguity also offers scope for flexibility and variation in a franchisor's approach.
The Indian government permits foreign franchisors to charge royalties up to 1% for domestic sales and 2% on exports for use of the foreign franchisor's brand name or trade mark, without transfer of technology. In effect, this means that by lending just their brand name or trademark to an Indian company, a foreign company can receive royalties. A foreign company must approach the Reserve Bank of India, India's banking regulatory authority, which is also responsible for exchange control regulations, if royalties exceeding the prescribed limits are sought.
If the proposed franchise arrangement involves technology collaboration, the government permits a lump-sum not exceeding US$2 million, to be paid to the foreign franchisor.
Usually, the Indian franchisee will pay the lump-sum in three equal installments. In addition, royalties up to 5% on domestic sales and 8% on exports can be paid to the franchisor without approval. However, no separate payments are permitted on account of brand name or trademark, and the technology or know-how and the fee on the former is presumed to be subsumed by the amount payable for the latter.
The government has specified a formula for calculation of royalties, which must be adhered to, before the foreign company can remit funds out of India. If the franchise agreement proposes royalties or lump-sum fees beyond the specified limits, the approval of the Foreign Investment Promotion Board is required. The Foreign Investment Promotion Board is the government agency responsible for reviewing and approving foreign investment and technology collaboration proposals. This review occurs on a case-by-case basis.
Taxation is another issue, which deserves due consideration. It is important to know the local sales tax, property tax, and withholding tax applicable in a certain area. Further, the way a franchise arrangement is structured and the existence of treaties between the countries involved may have considerable influence on the structure adopted.
In a case, where the franchisor receives royalties, service or franchise fees, tax has to be paid under the income tax act (as income arising and accruing in India), whether the franchisor is an Indian or foreign party. In a case where the foreign franchisor sends training personnel and supervisors to India, the salaries payable to these persons may be subject to personal income tax, whether an arrangement is made to deduct the tax at source or they are taxed as self-employed persons (if they come as consultants).
In calculating the amount of tax payable by the franchisor or the franchisee company, the deductions available in tax laws of India can be important for tax planning. Some of these relate to rent, repairs and insurance in respect to premises used for business; depreciation and expenditure on research; and expenditure of capital nature on acquisition of patent rights or copyrights. However, the availability of tax advantages depends on the type of franchise, the product of the franchise and unit locations.
It must be noted, the above is subject to double taxation avoidance agreements involving India and any foreign country. The tax liability would be reduced accordingly. The income tax law inIndia gives recognition to this and double taxation agreements take precedence over the terms of the income tax act.
India is a signatory to the international conventions on intellectual property rights, thereby, offering protection to trademarks or brand names, as well as copyright and designs of the foreign franchisor. A significant recent step includes recognition and protection extending to service marks in India. This enables the foreign franchisor to tender its mark to a franchisee in order to extend the services synonymous with him to the consumers in India.
Foreign franchisors should take time to understand the huge potential India offers to their business. A combination of a resolved legislative will and business people up-skilled by foreign franchisors will advance a new era of successful franchising in India - raising the standard of the products and services for Indian consumers.