Ahead of the new NDA government taking charge, officials in the department of industrial policy and promotion (DIPP) will meet on Tuesday to firm up a proposal for ?reasonable curbs? on royalty outflows from MNC arms in India, which have seen a surge in recent years.
Royalty has become one of the means of profit distribution by a subsidiary to a foreign parent company, although technically it is the fee that the Indian arm pays its foreign parent for technology transfer or use of trademarks and brand name.
Tuesday’s meeting at DIPP, sources said, will consider a proposal to introduce some modest curbs to ensure that the country gets the full benefit of foreign investment inflows, including ?more jobs and asset creation?. The department is also considering floating a discussion paper on royalty payments to seek comments from stakeholders, they said, adding that the BJP manifesto states that one of their focus areas will be to ensure that FDI results in more jobs and asset creation. The BJP also stressed that the CAD should be kept at manageable levels. One of the outflow items that needs a re-look are royalty payments.
The royalty payments of Indian firms were $6.99 billion, or 18% of the foreign direct investment inflows in 2012-13, a 57.43% increase from $4.44 billion or 13% of FDI inflows in 2009-10.
Officials said though reimposing restrictions that existed prior to 2009 could adversely impact foreign investment, there was a need to study the reasons for the increase in royalty outflows and examine whether these are commensurate with the sales and profits of the firms concerned. Protecting the interests of minority shareholders of the MNC arms is another concern.
The curbs on royalty payments were lifted in 2009 with an intention to boost foreign investment and technology transfer. Till then, though, royalty payments by a wholly owned subsidiary to its offshore parent could be done at any time, such payments for technical collaborations with technology transfer were capped at 5% of domestic sales and 8% of exports. The payments of royalty on use of trademarks and brand name of the foreign collaborator without technology transfer were capped at 2% of exports and 1% of domestic sales.
The government had in the 2013-14 Budget increased the rate of tax on payments by way of royalty and fees for technical services to non-residents from 10% to 25%. But this did not have much effect as India has Double Tax Avoidance Agreements with many countries where rates are lower, and the DTAA prevails over the domestic law when there is a conflict. However, a provision that has impacted royalty payments is Section 188 of the Cos Act, which specifies that related party transactions should have 75% of public shareholders favouring such a move through a special resolution.
