The Trinidad-born British writer had been one of the biggest names booked for this year's Ubud Writers and Readers Festival (UWRF), scheduled for the start of next month on the Indonesian resort island.
However the event's founder and director, Janet DeNeefe, said they had decided to cancel his appearance after he asked for the fee.
"After having committed to the festival months ago, Sir VS Naipaul made an 11th-hour request for a USD 20,000 appearance fee that would have jeopardised the longevity of the UWRF and all of those involved," she said in a statement sent to AFP.
The organisers said the USD 130 tickets to the "Evening with VS Naipaul" would be refunded in full. He had also been due to feature in a one-hour "In Conversation" session.
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Naipaul's agent Andrew Wylie could not immediately be contacted but in comments to the Guardian newspaper disputed the account, saying the withdrawal was due to a conflict in the author's schedule and not fees.
The festival runs from October 1 to 5 and involves some 150 writers from 25 countries.