Franchise Security Deposit Under Various Scenarios

[Guest]

Dear Sir/ Madam,

Assessee is a financier(franchisor) who finances businesses and extends financial services to their member agents(franchisee) to extend such services to customers all over india. The aim is to provide easy financing and earning for people in remote areas.

To start the agreement of franchising, the assessee has to make 2 deposits:

1. A fully refundable working capital deposit. (will be refunded at the time of termination/completion of agreement).

2. A fully/partially/no-refund deposit against the assest given for sale for starting the business ,ex: computer supplied against deposit (the deposit is fully/paqrtially/no-refund based on the time period of 3 years, and normal wear and tear).

Possible Outcomes/Query:

1. The client has asked us first and foremost that what is the applicability of VAT And CST In the state of maharashtra on these deopsits.

2. In case due to depreciation and partial refundable deposit in case of assets or no refundable deposit from assets, how should the income be recognised ?

3. How should the income be recognised, meaning to say, if i give an asset out for 20,000 and after 3 years receive the same fully depreciated asset back , i have to refund nil to the agent, how must the income be recognised and hen should i recognise it(at the time of depreciation during the various years or on expiry of 3 years )?

Thank you

Regards,

clutch.

[Ganeshan Kalyani]

Sir, please clarify who is giving deposit to whom. Pls. Explain with example, say A, B etc. Thanks.

[YAGAY andSUN]

Please refine/revamp your query for enabling to revert.

[DR.MARIAPPAN GOVINDARAJAN]

It is requested to give the query complete in aspect so as to render opinion on the query.

AI Summary

Tax treatment of franchise deposits: determine VAT/CST exposure and timing of income recognition for refundable and non refundable deposits. The key issues are (i) whether fully refundable working capital deposits and refundable/partially or non refundable asset deposits taken by a franchisor are subject to VAT or CST as consideration for supply or are excluded as refundable security deposits, and (ii) the proper timing and manner of recognising income where asset deposits become non refundable - whether immediately on conversion, apportioned over the asset's depreciation period, or on expiry - with factual contract terms determinative.