Hike in withholding tax rate: Indian arms of MNCs may not feel sharp pain

India's tax treaties with most major economies cap withholding tax on royalties and technical fee at 10%

Listed Indian subsidiaries of global multinationals (MNCs) spent nearly Rs 7,000 crore on payment of royalty and technical fees to their parent companies in CY21/FY22. More than half the amount (Rs 3,770 crore) was paid out by do­m­estic subsidiaries of Euro­pean and American MNCs, such as Hindustan Unilever, Nestlé India, Colgate-Palmolive, BASF India, and Bosch, according to Capitaline Database.

The Indian subsidiaries of these MNCs were, so far, paying a withholding tax at the rate of 10 per cent on payment of royalty and technical fees to their parent. The finance Bill, cleared by Parliament on Monday, has now doubled the rate of withholding tax to 20 per cent. The hike is, however, likely to have only a marginal financial impact on most of the Indian subsidiaries.

Withholding tax is a kind of tax deduction at source (TDS) for which a domestic company making a payment of royalty or technical fees deduct a tax on it at a given rate. The tax is paid by the payer and not the recipient of the payment.

India has signed tax treaties with 96 countries across the world; withholding tax on the payment of royalty and technical fees is capped at 10 per cent with the majority of jurisdictions. They cover most major world economies, such as the US, the UK, Japan, South Korea, China, France, Germany, and Switzerland. Most MNCs operating in India are from these key economies.

In the listed space, Maruti Suzuki was the biggest spender on royalties and tech­nical fees (Rs 3,005 crore) in FY22, followed by Hindustan Unilever (Rs 852 crore). Others on the list were Nestlé India, Colgate Palmolive, Bosch, Hitachi Energy, ABB, P&G Hygiene, Schaeffler India, and Akzo Nobel. These 10 companies together spent Rs 5,120 crore on royalties and technical fees in CY21/FY22.

According to the Reserve Bank of India (RBI), all companies in the country (listed and unlisted) together spent $9.04 billion or around Rs 68,551 crore in FY22 on royalties and technical fees for the use of intellectual property.

Given this, analysts say that Indian subsidiaries of most MNCs will use the provisions of tax treaties and continue to pay withholding tax at the previous rate of 10 per cent. This, however, will raise their compliance cost as their parent company should now be a resident or headquartered in countries with a favourable tax treaty with India. Many MNCs own their Indian subsidiaries through holding or investment companies based out of neutral jurisdictions, such as Singapore and Mauritius. After the tax hike in the finance Bill, quite a few MNCs may have to reorganise the ownership structure of their Indian subsidiaries, which will translate into higher compliance and regulatory cost for them.

The doubling of withholding tax will pinch the Indian subsidiaries of MNCs from Italy and Denmark.

India’s tax treaty with these two countries prescribes a withholding tax of 20 per cent, on both royalty and technical fees.

A few other countries with prescribed taxes higher than 10 per cent under tax treaties include Turkey (15 per cent), Poland (15 per cent), Mauritius (15 per cent), and Belarus (15 per cent).

India’s tax treaty with the US and the UK prescribes two rates of withholding tax — 10 and 15 per cent depending on the categories of royalties and fees for technical services.