Quick Summary & Key Takeaways (Featured Snippet)
1. Statutory Classification & HSN 9973 Scope
Intellectual property represents intangible personal property. Under the pre-GST regime, whether IP transfer was a "sale of goods" (liable to VAT) or a "service" (liable to Service Tax) spawned endless litigation.
Under Section 7 read with Schedule II (Paragraph 5(c)) of the CGST Act, 2017: "Temporary transfer or permitting the use or enjoyment of any intellectual property right" is explicitly classified as a Supply of Services under Service Accounting Code (SAC) 9973.
2. Trademark Licensing vs Permanent Assignment
Trademark Licensing (Temporary Use)
The licensor retains proprietary ownership of the registered trademark while conferring limited, revocable, non-exclusive or exclusive commercial rights to the licensee in exchange for recurring royalties or turnover percentages.
Trademark Assignment (Permanent Sale)
The assignor permanently sells and transfers all proprietary rights, goodwill, and title in the trademark to the assignee through an assignment deed registered with the Trade Marks Registry under Section 37/38 of the Trade Marks Act, 1999.
3. Applicable GST Rates & HSN Tariff Slabs
| SAC / HSN Code | Nature of Intellectual Property Supply | GST Rate |
|---|---|---|
| SAC 997331 | Licensing services for the right to use trademarks and franchises | 18% (9% CGST + 9% SGST) |
| SAC 997332 | Licensing services for the right to use research, patents, and designs | 18% |
| SAC 997339 | Permanent transfer of intellectual property rights (other than software) | 18% |
| HSN 998399 | Management and advisory services for brand positioning | 18% |
6. Cross-Border Royalties & Import of OIDAR / IP Services
When an Indian business pays brand royalties to an overseas parent (e.g., McDonald's India, Domino's / Jubilant FoodWorks, Hyundai India):
- Import of Services: Under Section 2(11) of the IGST Act, the supply of service where the supplier is outside India, the recipient is in India, and the place of supply is in India constitutes an Import of Service.
- Mandatory 18% IGST under RCM: The Indian recipient must pay 18% IGST in cash in Table 3.1(d) of GSTR-3B.
- 100% ITC Recovery: The IGST paid under RCM is fully creditable in Table 4(A)(3) of Form GSTR-3B during the exact same filing period.
7. Head-to-Head: Permanent Transfer vs Temporary License
| Parameter | Permanent Trademark Assignment | Temporary Brand Licensing |
|---|---|---|
| Legal Nature | Outright sale / transfer of title & goodwill | Permission to use / franchise license |
| GST Classification | Supply of Service (SAC 997339) | Supply of Service (SAC 997331) |
| GST Rate | 18% | 18% |
| Payment Structure | One-time capital consideration | Recurring periodic royalties (% of sales) |
| Income Tax Treatment | Section 55 Capital Gains on Intangibles | Section 37 Business Expense / Sec 194J TDS |
8. Input Tax Credit (ITC) on Trademark Royalties
GST paid on brand licensing is neither blocked under Section 17(5) nor restricted by general exclusions:
Statutory ITC Conditions (Section 16)
- Possession of a tax invoice or debit note issued by the brand licensor.
- Invoice details accurately populated in Table 4 of Form GSTR-2B.
- Payment of consideration plus GST completed within 180 days from the invoice date.
- Used exclusively in the course or furtherance of taxable business supplies.
9. Drafting Royalty Agreements: Essential GST Clauses
10. Major Departmental Audit & Scrutiny Triggers
Recurring GST Notice Ground
- Failure to Cross-Charge Corporate Brand: Departmental audit teams issue Section 74 notices calculating deemed brand royalty as 1% to 2% of subsidiary revenues. Group entities must establish an internal cross-charge valuation policy!
- Delay in Paying RCM on Foreign Royalties: Under Section 13(3) of the CGST Act, the time of supply for RCM in case of associated enterprises is the date of entry in the books of accounts or date of payment, whichever is earlier. Delayed booking attracts Section 50 interest!
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