McDonald’s, Domino’s and 200 others now face a Rs 30,000 cr tax demand.

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Around 200 firms, including McDonald’s India, L’Oreal, Colgate Palmolive, Castrol, Saint-Gobain, Whirlpool, Mastek, and Domino’s Pizza, have received notices from state authorities seeking tax under the pre-Goods and Services Tax (GST) regime, according to a report by The Economic Times (ET). The companies argue that they cannot be taxed on the same item as both “goods” and “services” and have subsequently moved various high courts and the Supreme Court.

The tax authorities sent these notices in the past six months. They are seeking approximately Rs 30,000 crore in taxes for the financial years FY11 to FY15. The states have imposed value-added tax (VAT) on the transfer of intellectual property rights (IPRs) to franchisee services.

GST was introduced on 1 July 2016.

Several state authorities are categorising these intellectual property rights (IPRs) as “goods” and imposing VAT. States such as Madhya Pradesh, Tamil Nadu, Gujarat, Uttar Pradesh, and Maharashtra have issued these notices. Some firms have stated they had already paid service tax on these transactions.

One of the appellants told ET that the states are well aware of the post-GST stance on the taxation of IPR. However, they aim to increase their revenue from past issues.

The GST regime stipulates that 18 per cent of GST is applicable on the permanent transfer of IPR if it is treated as a “supply of services” or “supply of goods”. The matter is currently pending before the Supreme Court.

An official from the Central Board of Indirect Taxes and Customs (CBIC) informed The Economic Times that the demand being raised pertains to the pre-GST period and that officials are awaiting guidelines from the Supreme Court.

What is Value-Added Tax (VAT)?

VAT is an indirect tax levied on goods and services, accounting for the value added at every stage of the production or distribution cycle, starting from raw materials and extending to the final retail purchase. VAT was introduced on 1 April 2005. The tax identifies the amount of value addition at each stage before levying tax on it. VAT was eventually superseded by GST.