Indian companies’ royalty pay under lens

Government Reviews Outgo to Parents, Move Follow Sebi Action for Listed Companies

There are so many small and big organizations which generate a lot money through royalties but royalty payment by unlisted companies to their overseas parents is under the lens after data from the income me tax departments revealed massive payouts to MNCs.

Royalty payments

A royalty is a payment made by one party, the licensee or franchisee to another that owns particular assets, the licensor or franchisor for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenue derived from the use of assets or a fixed price per unit sold of an items of such, but there are also other modes of metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments.

A few years ago, when the issue was last discussed the finance ministry was of the view that companies should not be mandated to seek prior government approvals for royalty payments and all these issues should be left to them.

At the same time, others ministers believe that royalty payment in perpetuity should not be allowed as it transfer of profits through other means and given, that it is a business income, there is also a loss to the exchequer. “Ideally, it should taper off over a period of time. It cannot be at the same rate for 15-20 years,” said a government official.

Royalty tax in India

The payer or the user of the royalty or recipients of the technical service may be the government or any other Indian concern. If the agreement is an eligible one, such income is taxed at a lower, preferential tax rate.

Royalty/FTS for non residents are taxable in India if sourced in India.

  • Out of 111 companies from a sample of 231, auto sector paid maximum royalty between 2006 and 2016.
  • Rising trends seen in case of automobiles, electronics, auto ancillary, IT and engineering.
  • A study proposed need for dynamic caps on royalty outflows, with limits for domestic and exports markets respectively.
  • Suggested 4-6% cap for domestic markets in first four years, followed by 2-3%
  • A cap of 7-9% for enterprises that cater to the export markets
  • Also suggested a technology Absorption facilitation fund

To be sure, the street is seeking clarity on a number of issues. First, whether all existing agreements of Indian units making more than 2 percent in royalty payments need approvals or would the modification in royalty payments apply to new pacts. Second, there is scope for clarity on the treatment of brand royalty and technology fees.

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