Govt plans to free royalty, tech fee in foreign tieups
Surajeet Das Gupta / New Delhi Jul 11, 2009, 00:13 IST
DIPP seeks automatic approval, has Plan panel and DEA’s support
Thousands of companies that have foreign collaborations and many more that will do so in future stand to benefit as the government plans to free payment of royalty for use of trademark or brand and of technology transfer fees.
At present, if the technology transfer fee exceeds $2 million, it has to be approved by the Projects Approval Board, under the Ministry of Commerce and Industry. For royalty, the limit is 5 per cent of domestic sales and 8 per cent of exports. If there is no transfer of technology, royalty is capped at 1 per cent of domestic sales and 2 per cent of exports.
LOOSENING THE TAPE
1991 POLICY: Automatic approval for technology transfer allowed in high priority areas up to $2 million, royalty of 5 per cent of domestic sales and 8 per cent of exports subject to a total payment of 8 per cent of sales over a 10-year period from date of agreement or 7 years from commencement of production. Specific rules for the hotel industry
CURRENT POLICY: Automatic approval is permitted for technology transfers only in cases involving payment of $2 million and royalty of 5 per cent of domestic sales and 8 per cent of exports.
Royalty up to 2 per cent of exports and 1 per cent of domestic sales is allowed under the automatic route on use of trademarks and brand names of foreign collaborator
PROPOSED POLICY: Allow all payments for royalty, know-how fee for transfer of technology, payments for use of trademark or brand name through the “automatic route” without any restrictions and subject only to the FEMA (Current Account Transactions) Rules of 2000
Since 1991, when the country started to liberalise its economy and industry, the government has approved 8,035 technology collaborations between Indian and foreign companies, the bulk of them with companies in the US, Germany, Japan, the UK and Italy.
A draft Cabinet note prepared by the Department of Industrial Policy & Promotion (DIPP), under the commerce ministry, proposes to put such payments on the “automatic route” without restrictions and subject only to the Foreign Exchange Management Act (Current Account Transactions) Rules of 2000.
The Cabinet note has gone to the Cabinet Committee on Economic Affairs, which is expected to take it up soon.
DIPP’s move has been endorsed by both the Planning Commission as well as the Department of Economic Affairs, both of which play critical roles in such policy decisions.
The current policy was formulated in 1991, when the country faced a severe shortage of foreign exchange and had to mortgage its gold. It was relaxed a little in 1996, but remained strict.
According to DIPP, the situation has changed significantly, with the country sitting on foreign exchange reserves of over $300 billion. Therefore, the department says, there is no justification for any restriction on payment of royalty. It has also argued that in a globalised economy the evaluation of technology and assessment of quality and justification for the knowhow and royalty payment need to be left to commercial considerations of the parties entering the contract. The issue should not be in the domain of the government.
However, such payments involve foreign exchange outflows, which are administered through FEMA rules, that decide which transactions cannot be allowed and which require approval of the Reserve Bank of India.
The issue of cap on royalty fee is misunderstood.
1. there is no absolute cap. the cap is only for the automatic route. you can in fact apply for a higher fee.
2. the cap was there to help regulate outflow of forex and not for taxation policies.
3.In no way the income tax officers are bound to any FEMA regulations. The rules coexist in parallel so that even now when there is cap they can, and actually DO scrutinize deals and on many occasions rule for higher tax.
4. On the contrary, many foreign COs argued when scrutinized that they comply with the FEMA regulations - which in their view provided support to the legitimacy of their cost/revenue structure.
5. It is the responsibility of the Tax department to handle taxation using transfer pricing, and not through an agency that primarily was established to handle foreign exchange reserves and regulations.
in my view some restrictions need to be placed otherwise it can be misused. it will be much better for foreign companies and foreign shareholders to take out money by way of royalty as this will be more cost effective to them and it is more applicable to closely held companies of foreign investors. the royalty expense will be tax deductible and indian co will save a tax of 34% and withholding tax is only 10.33%. the foreign co will benefit and tax departmwnt will suffer. hence a reasonable monetary restriction must continue. the remittance through entails a DTT OF 17% AND NO TAX DEDUCTIONS. THUS FOR ALL CLOSELY HELD COMPANIES HAVING A SIGNIFICANT SHAREHOLDING WILL RESORT TO THE ROYALTY ROUTE WHICH WILL BE DETRIMENTAL TO THE COUNTRY. PLEASE PUBLISH THIS AND SEND ME A COPY AS WELL
Posted by: ksr
July 11 , 2009, 23:29 IST
sir the payment of royalty can still be made in other manner to ensure the compliances are adhered to and also that it does not cause any attention of the regulators so long as people and companies want to resort to that route. ultimately it all boils down to self-discipline and whether each one of us want to follow the rules of the land
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