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An Indian restaurant franchisee owes the franchisor four parallel monthly flows — brand royalty, national marketing fund, technology fee, and supply-chain margin on commissary purchases — each with its own GST treatment and the royalty line subject to TDS under the new Section 393 with payment code 1003, and a generic AP reconciliation does not handle this correctly.
Reconcile each franchisee invoice line against its own base: royalty against franchisee POS gross sales × contracted royalty rate, NMF against gross sales × NMF rate, tech fee against transaction count or fixed monthly base, commissary supply against goods received and tax invoices. Apply 18% GST input tax credit on services (royalty, NMF, tech fee) only against 18%-with-ITC revenue lines. Deduct TDS on the royalty payment under Section 393(1)(b) with payment code 1003.
Franchisee POS sales feed by day; royalty rate, NMF rate, tech fee schedule from the franchise agreement; commissary item master and GST rate map; 18% ITC eligibility flag by revenue line; TDS engine configured for new payment code 1003 on royalty; cross-era handling for any opening balance carried from the legacy 194J era.
A monthly franchisee close where each franchisor invoice ties to its own base, GST input tax credit is claimed only against eligible revenue, salary TDS challan reflects royalty TDS under code 1003, and the franchisor's GSTR-1 outward supply lines reconcile to the franchisee's GSTR-2B inward supply.
A Bangalore franchisee operating six outlets of a national QSR brand closes April books and finds the franchisor invoice for ₹62.4 lakh — broken into four lines — does not tie to anything cleanly in the franchisee’s own ledgers. Brand royalty at 6.5% of gross sales is short by ₹1.8 lakh against the POS feed. The national marketing fund line at 2% includes orders that were cancelled at the customer end. The technology fee jumped 14% month-on-month with no explanation. And the commissary supply invoice carries a ₹3.2 lakh credit-note for spoilage that nobody at the outlet has documented. This is restaurant franchise royalty reconciliation in India — the standing four-flow close that every multi-outlet franchisee runs, every month, with the franchisor.
What franchisees actually pay every month
Indian restaurant chains — both global brands like Domino’s, Subway, KFC, and Indian-origin operators like Wow! Momo, Chai Point, Faasos, Behrouz — operate franchise models with broadly similar fee architecture. Five flows move money between the franchisee and the franchisor.
One-time franchise fee — paid at signing, capitalised in the franchisee’s books and amortised over the franchise term. Reconciliation is one-off; the audit point is correct treatment in fixed-asset and amortisation schedules, not monthly reconciliation.
Brand royalty — a recurring percentage of gross sales, commonly 4% to 8% in QSR and casual dining. Invoiced monthly. This is the largest variable franchisee outflow after rent and food cost.
National marketing fund (NMF) — a separate contribution, often 1% to 3% of gross sales, pooled centrally for brand-level advertising. Invoiced monthly alongside royalty.
Technology / platform fee — for the POS, ordering stack, loyalty platform, and any aggregator integration the franchisor provides. Often a fixed monthly fee plus a per-transaction component.
Supply-chain / commissary margin — embedded in the price the franchisor charges for prepared foods, packaging, and proprietary inputs supplied through the central kitchen. Invoiced as goods supply, not as a fee.
Each of these is a separate inward supply for GST. Each has a separate reconciliation. And the royalty line carries a TDS obligation that has changed under the new Income Tax Act 2025.
TDS on royalty — the Section 393 / code 1003 transition
For tax years from 1 April 2026 onwards, royalty payments by a franchisee to a franchisor fall under Section 393(1)(b) of the Income Tax Act 2025, and the TDS challan uses payment code 1003 in the new TDS schedule. The legacy reference is Section 194J — fees for professional or technical services and royalty — at 10% TDS. The TDS rate band carries through; what changes is the section reference, the return-form schedule, the challan minor head, and the payment-code field on the challan itself. Franchisees with a year-end royalty payable opening balance from the legacy era have to handle a cross-era reconciliation: the legacy challan and the new challan must both reconcile to Form 26AS at the franchisor end and to the franchisee’s TDS books. For the full mechanics, see Section 393 TDS reconciliation under the new Income Tax Act and the master payment-code reference in TDS payment codes 1001 to 1092.
The other recurring services from the franchisor — NMF contribution and technology fee — also typically attract TDS under Section 393 (fees for professional/technical services category) with payment code 1003 where the contractual nature is service delivery. Pure goods supplies through the commissary do not attract TDS.
Step-by-step reconciliation
Step 1 — Franchisee POS gross sales feed
The reconciliation base for royalty and NMF is the franchisee POS gross sales by day, by outlet. Cancelled orders, refunds, and aggregator deductions need a documented treatment under the franchise agreement — most agreements compute royalty on net sales (after refunds, before commissions), but the precise definition is contract-specific. Aggregator orders processed under restaurant reconciliation in India need to be summed before the royalty base is computed, not after the aggregator deduction.
Step 2 — Franchisor invoice line decomposition
The franchisor’s monthly invoice carries four or five lines: royalty (with rate and base shown), NMF (with rate and base), technology fee (with components), commissary supply (or a separate goods invoice), and any reimbursements or credit notes. Each line is reconciled against its own base independently. Mixed reconciliation against the invoice total — common in small franchisees — hides rate variances on individual lines.
Step 3 — GST input tax credit routing
The royalty, NMF, and technology fee lines carry 18% GST. The franchisee claims ITC against eligible outward supplies only — 18%-with-ITC revenue (catering, hotel-attached services). ITC against 5%-no-ITC standalone restaurant supply is blocked. A franchisee operating only as a 5%-no-ITC standalone restaurant cannot claim ITC on these inward services at all, and must expense the full GST as a cost. A mixed-supply franchisee (5% restaurant + 18% catering) has to apportion ITC under Rule 42 of the CGST Rules.
Step 4 — TDS deduction on royalty and services
The franchisee deducts TDS on the royalty line at the rate applicable under Section 393(1)(b), pays the franchisor net of TDS, and remits the deducted amount to the income-tax department using payment code 1003 on the TDS challan. The franchisor’s PAN must be on file and validated; the TDS deducted must reflect in the franchisor’s Form 26AS in the same quarter. Mismatches surface as franchisor disputes against the franchisee TDS certificate at year-end.
Step 5 — GSTR-2B and bank settlement tie-out
The franchisor’s GSTR-1 outward supply lines should appear in the franchisee’s GSTR-2B inward supply for the same period. Mismatches — franchisor not filed yet, franchisee invoice missing on the franchisor side, IGST vs CGST+SGST mis-state classification — block ITC claim. The bank settlement is the last step: net amount paid to franchisor (royalty + NMF + tech fee + commissary − TDS deducted) must tie to the bank debit. Card-paid and aggregator-deducted franchisor settlements (where the franchisor takes royalty directly out of the payment gateway reconciliation feed) require an additional decomposition step before the bank tie-out works.
Reference table — common variances
| Line | Common variance | Root cause | Resolution |
|---|---|---|---|
| Royalty | Invoice base does not equal POS gross | Refund/cancellation treatment differs | Restate per franchise agreement clause |
| NMF | Cancelled orders included in base | Franchisor source feed is pre-cancellation | Raise dispute; restate next cycle |
| Tech fee | Sudden jump | Per-transaction component re-tiered | Validate against contract; raise if outside band |
| Commissary supply | Quantity received less than invoiced | Receiving discrepancy or wastage | Inventory reconciliation; credit note |
| TDS on royalty | Code 1003 challan not reflecting in 26AS | Wrong PAN or section reference on challan | Correct via challan correction request |
| GST ITC | ITC blocked on 5% revenue line | Rule 42 apportionment missing | Recompute apportionment; restate GSTR-3B |
What automated reconciliation changes
A franchisee operating six to twelve outlets typically spends four to six days each month on franchisor reconciliation, and disputes against the franchisor on royalty base and NMF inclusions are routine. Purpose-built reconciliation software India for restaurants handles the four-flow split natively: separate base computation per line, GST ITC routing under Rule 42, and TDS deduction under the new Section 393 with payment code 1003. TransactIG carries 24+ industry presets and a restaurant configuration that handles the franchise variant — including cross-era TDS handling for the 194J-to-1003 transition. Customer outcomes include match-rate improvement from 51% to 88%, with implementation in two-to-four weeks on AWS Mumbai (ISO 27001:2022). For franchising contractual standards in the Indian restaurant industry, the FHRAI publishes guidance for both franchisors and franchisees. For the restaurant chain industry surface, see the Restaurant Chains industry guide. For the buying-intent surface covering this rail, see the restaurant reconciliation software for India overview, and for a head-to-head against the aggregator-side reconciliation tool category, see TransactIG vs Cointab.