COMMENTARY
INTERVIEW
SPECIALS
CHAT
ARCHIVES

Indian firms may pay royalty for 15 years instead of 10

Kevin James in New Delhi

There’s good news for multinationals. The finance ministry has proposed that Indian companies give suppliers of foreign staggered payment of royalty over 15 years instead of 10 years, though at a lower rate.

Current foreign technology agreements state royalty should not exceed five per cent on dometic sale and eight percent on exports. In addition, the Indian firm has to pay a lumpsum, not exceeding $ 2 million.

The ministry proposes to lower royalty rates by two per cent and extend the payment period by five years. This will give the foreign firms the edge, as the technology will most likely be obsolete in 15 years while they are still collecting money and interest on them.

The industry ministry, which is the nodal agency for foreign collaborations and technology agreements, is yet to give its assent to the finance ministry's proposal. Industry ministry officials said that since the rate of royalty paid by Indian companies is often far less than the five and eight per cent ceilings, it will be very difficult to work out the financial implications of extending royalty payment periods.

Though the proposal may reduce the burden on companies which pay high royalty rates, it will adversely affect companies that don’t have trouble paying now but won’t want to pay the same cost with interest over 15 years.

For instance, if an Indian company is paying royalty at the rate of three per cent on domestic sales now, it will have to pay the same amount for five more years if the ceiling is brought down to three per cent.

According to industry ministry officials, though individual companies pay less in the short term, more forex will be lost in the long run.

Indian companies operating in high-tech and research-intensive areas stand to gain though. Besides, the decreased financial burden on an annual basis, the long period for technology absorption may remove the hesitations of MNCs to sell their technologies to Indian firms.

Industry sources said there has been marked growth in the number of Indian companies accessing foreign technologies. With the proposed reduction in the royalty rate ceiling, more domestic companies are likely to buy state-of-art technologies, experts said.