Written By: Khushboo Verma

India's franchise sector is growing fast.. There is one thing that is quietly eating into the returns of every franchise: the New GST Rule. This is not because the GST is new. It is because the government is enforcing it strictly now and the rules for reconciling GST payments have changed. Most franchisees are still calculating their margins the way.

The result of this is that the returns on investment look good on paper. They are actually less in real life. This article will break down how the New GST Rule is affecting franchise costs and margins and what franchisees can do about it.

What is the Impact of the New GST Rule on Franchise Costs and Margins?

The New GST Rule means that every franchisee in India has to pay 18% GST on franchise fees, brand royalties and support charges in addition to the base investment.

Here are the key effects of the New GST Rule:  

• It increases the amount of cash that franchisees have to pay upfront on the day
• It creates a gap in the working capital because the Input Tax Credit (ITC) is delayed
• It reduces the margins when it is not factored into the projections
• It adds a fixed cost for compliance that most investors do not think about
• It changes the calculations for returns on investment by 2 to 5% when it is ignored during the diligence

What is the GST Rate on Franchise Fees in India?

The GST rate on franchise fees in India is 18% under the SAC code 998396 which is classified as Trademarks and Franchises under Heading 9983 of the CGST Act, 2017. This applies to the franchise fee, royalty, brand usage fees and technical support charges.

Here are the details about the GST on franchise fees and royalties:

• The GST on franchise fees and royalties is 18% under the SAC code 998396 Heading 9983 of the CGST Act 2017
• This applies to:
• The initial franchise fee
• Brand usage and trademark rights
• Ongoing monthly royalty
• Marketing and advertising contributions
• Support and training fees
• Territory or exclusivity fees, where applicable

For example if the franchise fee is Rs. 12 Lakh the GST will be Rs. 2.16 Lakh, making the total upfront payment Rs. 14.16 Lakh.

The GST is recoverable as ITC. The full payment is required upfront. Under the franchise policies brands do not allow much flexibility in the payment timing.

This matters because the franchisee who pays Rs. 12 Lakh is actually paying Rs. 14.16 Lakh on the day. The Rs. 2.16 Lakh goes into the ITC ledger not into the operations. It can only be recovered after the output tax liability is adjusted. If it takes 3 to 6 months to break the ITC sits idle during the most cash-heavy phase. Many first-time franchisees only discover this gap after signing the agreement, not before.

The Royalty and GST 

The royalty and GST also have a cash flow impact. The royalty is a recurring charge and most franchise agreements set the royalty between 4% and 8% of the revenue. When the 18% GST is added the actual outflow is consistently higher than the projections.

For example if the monthly revenue is Rs. 15 Lakh, the royalty at 6% will be Rs. 90,000 And the GST at 18% on the royalty will be Rs. 16,200 Making the monthly outflow on royalty Rs. 1,06,200. Over 12 months the total GST paid on royalty will be Rs. 1,94,400, Which will sit in the ITC ledger waiting to be offset. If the adjustments are delayed this becomes blocked working capital. For a business with a revenue of Rs. 15 Lakh this is over 1% of the annual turnover tied up in royalty GST alone.

For businesses that operate on 15 to 20% margins this kind of blocked capital has a direct and measurable impact on the monthly cash availability.

The ITC timing gap

There is also an ITC timing gap, which is the time between paying the GST on expenses and recovering that credit against the output tax. This gap can stretch from weeks to months depending on the vendors behavior and filing timelines.

The gap widens when:

• A supplier does not file the GSTR-1 on time
• The invoice data does not match the GSTR-2B
• The sales are seasonal. The output tax is low in certain months
• The franchisee misses the claim window under the IMS system
• Multiple vendors have irregular filing patterns

The ones who get hit the hardest are:

• Tea kiosks and small food counters that run at 15 to 18% margins
• New franchisees in the 6 months before the revenue stabilizes
• Franchisees with inter-state supply chains and multiple GST registrations
• High-inventory formats like jewelry, where the stock values run into crores monthly

To reduce the ITC timing gap franchisees can:  

• Use accounting software that tracks the GSTR-2B mismatches in real-time
• Follow up with suppliers on the GSTR-1 filing status every month
• Maintain an ITC tracker outside the main P&L
• Flag vendors with repeated filing delays and renegotiate the supply terms if needed

What Changed Under the New GST Rule (September 2025)

In September 2025 some things changed under the New GST Rule. The area of change includes:  

• ITC reconciliation, which's now manual validation through the IMS every month
• GST slabs, which are mainly 5% and 18% with the 12% slab removed
• ITC claim basis, which now requires a sign-off through the IMS
• Compensation cess, which was eliminated by March 2026
• Compliance workload, which is now higher and requires manual reconciliation every month

The IMS change is the most significant as the ITC recovery is no longer passive and requires active monthly action from every franchisee.

In practice this means that franchisees must log into the IMS and validate the ITC claims every month. If the validations are missed the ITC will be. Lapsed. This adds 4 to 6 hours of reconciliation work per month per GST registration.

The multi-state franchisees with 3 or more registrations feel this the most. Several organized brands have added GST backend support to their franchise policies in response to these changes.

The Impact of the New GST Rule on Margins in Different Sectors

The New GST Rule has affected the margins in sectors in the following ways:

• Food and Beverage (QSR): The earlier net margin was 20-25% and the post-compliance net margin is 17-22%. The primary risk is the royalty and GST monthly outflow.
• Tea and Kiosk Formats: The earlier net margin was 15-18%. The post-compliance net margin is 13-16%. The primary risk is the ITC timing gap.
• Retail Franchises: The earlier net margin was 12-16%. The post-compliance net margin is 10-14%. The primary risk is the vendor ITC default.
• Jewellery Franchises: The earlier net margin was 8-12%. The post-compliance net margin is 6-10%. The primary risk is the working capital and GST.
• Education and Coaching: The earlier net margin was 18-22%. The post-compliance net margin is 16-20%. The primary risk is the ITC on supplies.

The key observations are:  

• Jewellery franchises have the margin to absorb the GST pressure
• Tea and kiosk formats lose the highest percentage relative to their base margin
• QSR brands with digital billing manage better as the ITC reconciliation is largely automated
• Education franchises face blocked ITC on costs related to GST- services
• Retail franchises are most exposed to vendor ITC defaults due to large and varied supplier bases

Why ITC Compliance is Harder Than it Looks

The ITC is available in theory but in practice it depends entirely on the suppliers filing correctly and on time every single month.

The ITC can only be claimed when all of the following conditions are true:

• A valid tax invoice is held
• The goods or services have been received
• The supplier has paid the GST to the government
• The invoice appears in the GSTR-2B via the IMS
• The payment to the supplier is made within 180 days of the invoice date

When any one of these conditions fails the ITC for that invoice cannot be claimed that month. The franchisee must follow up, wait for the correction and refile.

In high-volume months multiple such blocks create cash flow pressure. Penalties apply if incorrect ITC is claimed and later reversed during the audit.

For jewellery and inventory retail franchises a 2 to 3% mismatch in vendor filings means lakhs in blocked credit every month. This is why franchise policies must now include a brand commitment on vendor compliance and filing discipline, not just branding and operational support.

The Monthly GST Compliance Cost

The estimated monthly cost for GST compliance activities is as follows:

This cost varies by volume the number of registrations and whether the accounting is in-house or outsourced. Multi-state operations sit at the end.

Questions to Ask Before Investing in a Franchise

Before investing in a franchise do not evaluate it on margin or brand name alone. Ask the following questions:

On costs:

• What is the total franchise fee, including eighteen percent Goods and Services Tax?
• What is the monthly royalty, including GST? Calculate the outflow not just the base percentage.
• Do marketing, tech or support fees also attract GST?

On compliance support:

• Does the brand provide ITC reconciliation and vendor compliance monitoring?
• How is inter-state supply handled? Who bears the IGST cost?
• Is e-invoicing applicable for this brand? (Mandatory for turnover above Rs. 5 Crore)

On working capital:

• What do I need as working capital for six months considering the time it takes to get Input Tax Credit or ITC ?
• Has the franchisor given us a profit and loss statement that takes into account the goods and services tax, than just a basic margin figure?
• Does the brand always follow the rules for vendor filing compliance

FAQs

Q1. Can a franchisee claim ITC on royalties? Yes provided the supplier has filed the GSTR-1 the invoice appears in the GSTR-2B via the IMS. 

Q2. What is the monthly cost of Goods and Services? What is the cost of tax compliance? Rs. 14,500 To Rs. 31,000 Per month depending on the scale number of registrations and whether accounting is outsourced.

Q3. Does inter-state franchise supply attract GST? Yes, inter-state transfers attract IGST. Each state registration is treated as an entity adding billing and reconciliation complexity.

Q4. What changed under GST 2.0 for franchisees? The IMS replaced the auto-generated ITC under GSTR-2B. The Budget 2025 amended Section 38 making manual monthly ITC validation mandatory, for every registered business.

Q5. Which franchise format is most affected by GST compliance pressure? The franchise formats most affected by Goods and Services Tax compliance include tea kiosks, low-ticket kiosks, and jewellery franchises due to their thin margins and sensitivity to Input Tax Credit timing issues.

Q6. Is it still possible to make a profit from franchising in India with the costs of complying with the Goods and Services Tax? The answer is yes. However the profitability of a franchise now depends on how the franchisee plans for the cash flow related to the Goods and Services Tax and not just on the strength of the brand or the location. 

Final Takeaway

Before you sign any franchise agreement in 2026 you need to do things.

Calculate the cost with the 18 percent Goods and Services Tax included and not just the base fee.

• Account for the royalty plus the Goods and Services Tax as a cash outflow.
• Confirm that the brand offers Input Tax Credit reconciliation and vendor compliance support.
• Budget between Rs 15,000 and Rs 30,000 per month for compliance as a fixed cost.
• Plan your working capital for at least 6 months with the timing gaps of Input Tax Credit in mind.
• Ask for a Goods and Services Tax adjusted profit and loss statement before you commit your capital.

The franchise policies that are updated in 2026 will reward the operators who plan with numbers. The difference between the margins, on paper and the actual returns comes down to one thing, which's how well you account for the Goods and Services Tax cash flow timing.

If you are thinking about investing in a franchise in 2026, you should browse the verified franchise opportunities across India. Speak with a franchise advisor to get projections that reflect the real cost of investment.

Disclaimer: The brands mentioned in this blog are the recommendations provided by the author. FranchiseBAZAR does not claim to work with these brands / represent them / or are associated with them in any manner. Investors and prospective franchisees are to do their own due diligence before investing in any franchise business at their own risk and discretion. FranchiseBAZAR or its Directors disclaim any liability or risks arising out of any transactions that may take place due to the information provided in this blog.