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Rediff.com  » Business » Govt for discussion paper on royalty payment ceiling

Govt for discussion paper on royalty payment ceiling

April 29, 2014 12:40 IST

MoneyAmid worries over a 50 per cent rise in royalty payments by Indian firms to their foreign partners or multinational parents in four years to 2012-13, the government is likely to bring a discussion paper for review of the present unbridled policy, after the Lok Sabha polls are over.

“The discussion paper will come in the next couple of weeks,” a senior official in the Department of Industrial Policy & Promotion said. The last phase of elections will be over on May 12.

The paper will invite comments on whether or not the royalty ceiling applicable till 2009 should be re-imposed.

It would be a kind of consultative process, the official added.

Until December 16, 2009, lumpsum royalty payments were capped at $2 million.

For the cases where there were no flat rates, royalty payment for technological collaboration was capped at five per cent of domestic sales and eight per cent of exports.

For use of a brand name, royalty could be paid at up to one per cent of sales and two per cent of exports.

Till these caps were imposed, royalty payments could automatically be made by Indian companies to their foreign partners. Beyond these levels, approval of the Foreign Investment Promotion Board was required.

However, royalty payments have increased manifold since December 2009, when the caps were withdrawn and everything was put under the automatic route.

In 2009-10, about $4.44 billion was paid as royalty by Indian companies.

This was 13 per cent of foreign direct investment inflow into India that year.

In 2012-13, Indian companies’ royalty payments increased to $6.99 billion, or 18 per cent of India’s FDI inflows that year.

These payouts have increased 57.43 per cent in the space of four years.

According to a survey by Institutional Investor Advisory Services, a proxy advisory firm, royalty and related payments by 25 multinational companies increased 23.8 per cent to Rs 4,952 crore (Rs 49.52 billion) in 2012-13.

Of these, five companies -- Maruti Suzuki, Hindustan Unilever, Nestle India, Bosch and ABB India -- remitted Rs 3,979 crore (Rs 39.79 billion), the bulk.

Seventy-six per cent of the investors surveyed by IiAS indicated royalty and related payments were not a concern, provided these were linked to sales growth or returns on invested capital.

Of those surveyed, 15 per cent indicated there should be some form of checks, so that companies were not free to increase royalty rates.

However, nine per cent felt a liberal royalty regime was essential to encourage foreign investment into the country.

If the government decides to re-impose caps, would those be lower than those in 2009, or higher?

To this query, the DIPP official quoted earlier said there was no point in imposing lower caps.

Punit Shah, co-head of tax at KPMG in India, said: “Putting a higher cap would not send the right signal.

“Such parameters will be against liberalisation of exchange control regulations.”

Shah said there were several other laws, such as the new Companies Act and the Income Tax Act, which could deal with this issue, rather than interfering in the commercial activities of two parties.

“It may also have a negative impact on sharing technical knowhow,” he added.

To plug the loopholes, the finance ministry had increased the withholding tax on royalties paid by Indian companies to their foreign parents -- from 10 per cent to 25 per cent -- Budget 2013-14.

However, the countries with which India has double-taxation avoidance agreements were exempt from higher rate of tax.

The fact that India has DTAAs with more than 80 countries, including the US, UK, Germany, France, Japan and Korea, implies a higher tax rate means little.

The new Companies Act, however, has tightened the rules on royalty payments. Section 188 of the Act has made it mandatory that all related-party transactions be passed through a special resolution, requiring consent of 75 per cent of minority shareholders.

ROYALTY ROW

Changes in rules on payouts

LIMITS: There were various caps on royalty payments till the ceilings were lifted on December 16, 2009

SPURT IN PAYOUTS: Royalty payments by MNCs to their foreign parents surged 57% between 2009-10 and 2012-13

WITHHOLDING TAX: Budget 2013-14 raised withholding tax on royalty paid to foreign companies from 10% to 25%

EXEMPTION: The countries with which India has double-taxation avoidance agreements are exempt from withholding tax

TAX PACTS: India has such tax treaties with about 80 nations; as such, most companies are not drawing higher tax

Nayanima Basu in New Delhi
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