Direct Selling Rules, 2021: A Compliance Checklist for MLM Software
A practical checklist for India's Direct Selling Rules, 2021: entity duties, seller KYC, grievance officers, TDS, GST and the software features behind each.
Key takeaways
- The 2021 Rules apply to every direct selling entity and direct seller offering goods or services to consumers in India.
- Pyramid schemes and money circulation schemes are expressly prohibited; income must come from genuine sales to consumers.
- Entities need a registered office, a nodal officer, a grievance redressal officer and clear website disclosures.
- Software should enforce seller KYC, cooling-off returns, record keeping, TDS deduction and GST invoicing automatically.
- Tax rates and thresholds change often; verify the current position with your CA before configuring deductions.
Who do the Direct Selling Rules, 2021 apply to?
The Rules apply to all goods and services bought or sold through direct selling, to all models of direct selling (single-level and multi-level), to every direct selling entity offering goods or services to consumers in India, and to every direct seller working for such an entity. They also reach entities that are not established in India but offer goods or services to Indian consumers.
Two definitions matter most:
- Direct selling entity: the company or firm that sells or offers goods or services through direct sellers. It does not include an entity engaged in a pyramid or money circulation scheme.
- Direct seller: a person authorised by the entity, through a legally enforceable written contract, to undertake direct selling on a principal-to-principal basis.
What is prohibited: pyramid and money circulation schemes
The Rules forbid any direct selling entity or direct seller from promoting a pyramid scheme or a money circulation scheme, or from enrolling any person into such a scheme under the guise of direct selling. A pyramid scheme, in the language of the Rules, is a multi-layered network in which participants earn mainly from enrolling further participants rather than from selling goods or services to real consumers. Money circulation schemes are separately banned under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
A useful test: if commissions would still flow when no consumer ever buys a product, the plan is at serious risk of being treated as a pyramid scheme.
Your compensation plan design, not just your software, decides this. However, software can make the distinction visible: commissions should be computed on business volume from product or service sales, joining-only income should be avoidable, and reports should separate retail sales from distributor self-purchases. If you are still choosing a structure, our guide to binary, matrix and unilevel plans covers the compliance risks of each.
What obligations does a direct selling entity have?
The core duties fall on the entity. In summary, it must:
- Be properly constituted with a registered office in India. The entity should be incorporated or registered under Indian law and have at least one physical location as its registered office.
- Appoint a nodal officer. A nodal officer is responsible for ensuring compliance with the Consumer Protection Act and the Rules.
- Set up a grievance redressal mechanism. Appoint a grievance redressal officer, publish their details, issue a ticket number for each complaint, acknowledge it promptly (the Rules specify 48 hours) and resolve it within the prescribed period (one month from receipt).
- Publish website disclosures. Legal name, registered address, contact details including email and phone, grievance officer details, terms of the contract with direct sellers, and information on goods, prices, returns and refunds.
- Offer a cooling-off and return policy. Consumers must be able to cancel and return goods within a defined period, and the refund, exchange, warranty and buy-back terms must be disclosed in advance.
- Verify and monitor direct sellers. Maintain records of each seller's identity and address and a written contract, and monitor sellers' conduct.
- Keep records. Maintain records of direct sellers, products and transactions, with the details the Rules prescribe.
- Avoid misleading claims. No false representations about earnings, products or the business opportunity.
Direct sellers themselves must carry identity documents, obtain prior appointment for door-to-door visits, provide a bill or cash memo, and avoid misleading income or product claims. Your onboarding and training material should reflect these duties.
How do MLM software features map to each obligation?
The table below links each regulatory requirement to the software capability that supports it. MLM.ERP includes all of these as standard modules; see the full list on our features page.
| Obligation | What it means in practice | Supporting software feature |
|---|---|---|
| No pyramid or money circulation scheme | Income must be tied to genuine product or service sales | BV-based commission engine, retail vs self-purchase reports, configurable joining rules |
| Seller KYC and written contract | Verified identity, address, PAN and bank details; accepted agreement | KYC module with document upload and approval workflow, e-signature or click-wrap agreement log |
| Grievance redressal | Ticket number, acknowledgement and resolution within set timelines | Support ticket desk with timestamps, status tracking and escalation |
| Cooling-off and returns | Cancel, return and refund within the stated period | Order returns workflow with automatic reversal of linked commissions |
| Website disclosures | Legal, contact, grievance and policy information published | CMS-managed policy pages and footer disclosures |
| Record keeping | Sellers, products, orders and payouts retained and retrievable | Audit trail, 50+ reports, automated backups |
| TDS on commissions | Deduct and deposit tax on commission payments | Auto TDS deduction with PAN-based rates and downloadable statements |
| GST invoicing | Tax invoices for product sales | GST invoice generation with HSN codes and tax breakup |
| Monitoring sellers | Detect misconduct, duplicate or fake accounts | Fraud and IP monitoring, role-based access, 2FA |
How should TDS on MLM commissions be handled?
Commissions paid to direct sellers have generally been treated as commission or brokerage under Section 194H of the Income-tax Act, 1961. Under that section, as amended by recent Finance Acts, the TDS rate was reduced from 5% to 2% with effect from 1 October 2024, and the annual threshold below which no deduction is required was raised from ₹15,000 to ₹20,000 from 1 April 2025. Where the payee has not furnished a valid PAN, a higher rate applies under the no-PAN provisions.
Two important caveats. First, the new Income-tax Act, 2025 is due to replace the 1961 Act from 1 April 2026, and it renumbers the TDS provisions, so references to "Section 194H" may now point to a different section in your returns and software labels. Second, rates and thresholds are revised regularly. As of 2026, check the current Finance Act and confirm the position with your CA before configuring deductions.
What your software must do, regardless of the exact rate:
- Store each seller's PAN and validate its format at onboarding.
- Track cumulative commission per seller per financial year to apply the threshold correctly.
- Apply the configured rate, and the higher rate where PAN is missing.
- Produce reports that reconcile deductions with challans and quarterly TDS returns.
- Let admins change rates and thresholds without a code release.
What about GST?
Sales of goods and services by the direct selling entity are subject to GST in the normal way, so every order should produce a compliant tax invoice with the correct HSN or SAC code, rate and place of supply. Direct sellers who buy and resell products, or who earn commission above the GST registration threshold, may have their own GST obligations. The valuation of goods supplied to distributors has also been the subject of specific clarifications over the years. Because GST treatment depends on your exact model, take advice on how commissions, free products and promotional schemes should be treated before going live.
A pre-launch compliance checklist
- Have a lawyer review your compensation plan against the pyramid and money circulation definitions.
- Confirm entity registration, registered office, GSTIN and PAN.
- Appoint and publish a nodal officer and a grievance redressal officer.
- Publish disclosures, the seller agreement, and return, refund and cooling-off policies on your website.
- Enable mandatory KYC before any payout is released.
- Configure TDS rates and thresholds, verified with your CA for the current year.
- Configure GST rates and invoice templates per product.
- Test that a returned order reverses the related commissions.
- Turn on audit logging, role-based access, 2FA and automated backups.
- Schedule a periodic compliance review, as rules and tax rates change.
Final thoughts
The Direct Selling Rules reward businesses that can prove their income comes from real customers and that they treat sellers and consumers fairly. Good software turns that proof into everyday data: verified sellers, traceable orders, correct deductions and complete records. If you operate in India, our MLM software for India page explains the localised features in more detail.
Want to see how compliance controls work in a live system? Book a free demo of MLM.ERP and we will walk you through KYC, TDS, GST invoicing and the audit trail using your own plan.
Sources
Official texts referred to in this article. Laws and guidance change; check the current version before relying on it.
- Department of Consumer Affairs, Government of India: follow-up notice on the Consumer Protection (Direct Selling) Rules, 2021 (PDF)
- Department of Consumer Affairs: the Consumer Protection (Direct Selling) (Amendment) Rules, 2023 (PDF)
- India Code: the Prize Chits and Money Circulation Schemes (Banning) Act, 1978
Frequently asked questions
Are MLM businesses legal in India?
Multi-level direct selling is legal in India when income comes from genuine sales of goods or services to consumers and the entity follows the Consumer Protection (Direct Selling) Rules, 2021. Schemes that pay mainly for recruiting people are treated as pyramid or money circulation schemes and are prohibited.
Can software alone make an MLM business compliant?
No. Compliance depends first on a lawful compensation plan, proper registration and honest marketing. Software supports compliance by enforcing KYC, keeping records, deducting TDS, issuing GST invoices and tracking complaints, but the business remains responsible for its policies and conduct.
Do the 2021 Rules apply to foreign direct selling companies?
Yes. The Rules apply to direct selling entities offering goods or services to consumers in India, including those not established in India. Foreign companies should take Indian legal advice on registration, a local office and appointing the required officers before recruiting sellers here.
What should happen to commissions when a product is returned?
When a consumer cancels or returns an order within the cooling-off period, the business volume from that order should be reversed and any commissions paid on it recovered or adjusted. A good MLM platform does this automatically and records the reversal in the audit trail.
We design and build MLM software for direct selling companies in India and worldwide. This article reflects our product and implementation experience; it is not legal or tax advice.