Nestle India board has approved an increase in the royalty rate paid to its parent company. According to a statement issued today by the company, the processed food maker will increase its royalty to 4.5 per cent of sales over a period of five years from about 3.5 per cent now.
The rise has become possible after the government in Budget 2010 removed the percentage cap on payment of royalty by Indian subsidiaries to their principals abroad.
It was 3 per cent of sales if made in the country and 5 per cent of sales if made outside the country along with one per cent for brand name use.
To tap into this payment stream the government has proposed in Budget 2013-14 to hike the rate of tax on such payments for technical services to non-residents from10 per cent to 25 per cent.
A company statement said the payment will be increased 0.20 percentage points every year starting 2014. Though likely to impact the profit of Nestle India, it will strengthen its parent company’s financial performance.
“The board of directors of Nestle India negotiated and Nestle S.A. accepted the increase in royalty from 3.5 per cent to 4.5 per cent of sales in a staggered manner by making an increase of 0.20 per cent per annum over the next five years effective January 1st , 2014.
This increase is based on the lower limit of the ranges established by the two Indian firms and is in line with the erstwhile guidelines of the government of India. It is also comparable to the royalty being paid by the Nestle affiliates in similar countries,” the statement said.