Reduction in royalty fees to help source technology

Large companies like Maruti, Holcim pay less tax due to treaties

Indian companies paying royalty and technical fees to a non-resident can look forward to a lower tax as the Union budget has reduced the rate from 25 per cent to 10 per cent.

This will help Indian infotech and defence companies that have big technology requirements sourced abroad. Large companies like the Indian subsidiaries of Suzuki and Holcim, which pay hefty royalty to their parent companies, will not benefit much because they already pay lower tax at rates set out in treaties with their home countries, say experts.

A large number of Indian companies pay royalty and technical fees to their parent firms abroad and an additional tax on the fees (see chart).

According to Jigar Saiya, tax partner of BDO India, the base rate of tax and withholding from payment of royalties and technical fees to non-residents was increased from 10 per cent  to 25 per cent by the then finance minister, P Chidambaram, in 2013.

“This resulted in increased costs for many Indian businesses that were required to make payments net of taxes. The cost of paying royalty of $100 went up from $111 to $133,” Saiya said.

The proposed change, effective from April 1, will reduce the cost for Indian businesses that were required to pay royalties/FTS to non-residents net of tax. It will also reduce the tax withholding on payments to foreign companies providing technology or technical services to Indian businesses.

For certain incomes of foreign companies based in the US, UK and a few other countries, the proposed tax rate of 10 per cent is lower than those provided in tax treaties.

These initiatives will help support the government's 'Make in India' programme. Several defence companies might form ventures with Indian companies, said a Kotak analyst. Indian defence companies cannot compete for orders from the government because they do not have the technical capability.

Even though the government has allowed 49 per cent foreign direct investment in defence companies, multinationals are not interested in transferring technology till they are allowed a 51 per cent stake.

Chairman of Pipavav Defence, Nikhil Gandhi, said the budget had set out on the right direction by reducing royalty and technical fees. “This will go a long way in attracting multinationals to India and reduce the cost to companies of sourcing technology from abroad,” said he.

A CLSA analyst said the reduction in royalty would benefit companies like HCL Infosystems, Wipro Infotech and CMC that imported expensive packaged software or hardware. It was unlikely to affect the infotech sector significantly, the global brokerage firm said.