Navigating Franchise Tax Confusion: Do We Really Need to Pay Both Service Tax and VAT?

Hi,

Our organization is into franchise business. We are appointing franchises all over India, entering into a license agreement with the franchises.

We will render services only to our franchises like project support, marketing support, operational support, IT support, etc.

While signing, we will collect the initial license fee along with service tax, and the same will be remitted to the service tax authorities.

Also, we are collecting royalty from the franchises on monthly gross sales by some percentage, which will vary between 4% to 6%. The same will be collected along with service tax and remitted again to the service tax authorities as and when we collect the amount from our franchises.

Recently, the commercial tax department has issued notices to our organization that franchise services come under VAT, and hence, we are liable to pay VAT on the franchise services with effect from 1.4.2005 onwards. Accordingly, they issued the notices for state-related services VAT and for the rest of India services CST.

We protested, saying that since we are paying service tax on the same amounts, how can they expect us to pay the VAT/CST on the same services.

However, they didn't agree with our arguments and took our organization to the court of law.

When we filed a petition challenging the tax authorities, the High Court advised our organization to pay a deposit of 50% of the demanded amount. Accordingly, our organization has remitted 50% of the amount to the concerned authorities and is fighting the issue with the commercial tax department.

Please clarify whether we need to pay both service tax and VAT on the services rendered to our franchises.

Regards,

Murthy

Service Tax vs VAT

Hi,

Our organization is into Franchise Business. We are appointing franchises all over India and entering into a License Agreement with them.

We will render services only to our franchises, such as Project Support, Marketing Support, Operational Support, IT support, etc.

While signing, we will collect the Initial License fee along with Service Tax, and the same will be remitted to the Service Tax Authorities.

Additionally, we are collecting Royalty from the franchises on monthly Gross Sales by a certain percentage, varying between 4% to 6%. The same will be collected along with Service Tax and remitted to the Service Tax authorities whenever we collect the amount from our franchises.

Recently, the Commercial Tax Department has issued notices to our organization stating that Franchise Services fall under VAT. Therefore, we are liable to pay VAT on the franchise Services effective from 1.4.2005 onwards. They have issued notices specifying VAT for State-related services and CST for services in the rest of India.

We protested, arguing that since we are already paying Service Tax on the same amounts, it is unreasonable to expect us to pay VAT/CST on the same services.

However, they did not agree with our arguments and took our organization to the Court of Law.

When we filed a petition challenging the Tax authorities, the High Court advised our organization to pay a DEPOSIT of 50% of the demanded amount. Accordingly, our organization has remitted 50% of the amount to the concerned authorities and is currently fighting the issue with the Commercial Tax department.

Please clarify whether we need to pay both Service Tax and VAT on the services rendered to our franchises.

Regards,

Murthy