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The Indian exchequer will likely rake in an additional Rs 919.6 crore from the proposed hike in taxes levied on royalty and technical fees paid by India-based companies to their foreign partners. But Finance Minister P. Chidambaram’s motive behind the proposal to raise the rate to 25 per cent is not intended to penalise Indian companies sourcing technical services from overseas players.
He has left open an escape route for companies based in foreign countries with which India has a tax treaty, where the stipulated tax rates for such services is lower. In such situations, the treatment prescribed in the Double Taxation Avoidance Agreements (DTAA) will come into play.
Chidambaram noted in his Budget speech that the rates of tax on royalty in the Income-Tax Act were in fact lower than the rates provided in a number of DTAAs. As such, this was an anomaly that the Finance Minister sought to plug through the imposition of a more rational rate of taxation.
Indian firms paid around Rs 3,700 crore to foreign firms in the form of royalty and technical fees in 2011-12 for various technologies and knowhow. This was equivalent to about 1.3 per cent of their net sales for the year, or 8.7 per cent of operating profits. The cumulative tax liability on the royalty and technical fee payments was calculated at the rate of 10 per cent, amounting to Rs 367.9 crore for 2011-12.
Automobile giant Maruti Suzuki routed Rs 1,803.1 crore to its Japanese partner in lieu of technical knowhow and technology and branding royalties in 2011-12, making it the largest firm with such heads in its balance sheet. Hindustan Unilever (Rs 293.3 crore), Colgate Palmolive (Rs 140.95 crore), Bosch (Rs 129.1 crore), GlaxoSmith CHL (Rs 93 crore) and Moser Baer (Rs 76.3 crore) also made significant payments to foreign companies in the form of royalty and technical fees.
The majority of Indian firms paying royalty and technical fees to overseas players fall in the electrical and non-electrical capital goods space. This includes firms such as Alstom India and Schneider Electric. The next major category of firms is auto ancillaries such as Bosch, Motherson Sumi, Hero Motocorp and Hindustan Motors.
> arvind.jayaram@thehindu.co.in
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