A proposal limiting royalty payment for transfer of technology and payments for trademarks or brand name under the Foreign Direct Investment (FDI) policy is likely to be taken up by the Cabinet some time soon.

“Increased royalty payments deplete forex reserve. Also, we should not forget that as royalty payments are charged to revenue, it results in reduced or even no distribution of dividend which means domestic shareholders are at loss while foreign shareholders are in advantageous position,” a senior government official told BusinessLine adding that all these necessitated regulated outflow.

A draft Cabinet note was prepared on the recommendations of the Inter Ministerial Group (IMG) and is being readied to be placed before the Cabinet. It has been made clear that there will be no need to make any amendment in the Act to implement the proposed regime; it can be done through changes in rules by an executive order.

The proposed regime for ‘Payment of Royalty for Technology Collaboration and Professional/Consultation Fee for Technical Services/Management’ suggests that in case of technology transfer or technology collaboration, royalty payments to foreign collaborator either directly or indirectly through any entity will be capped at: for the first four years at 4 per cent of domestic sales and 7 per cent of exports; for the next three years, at 3 per cent of domestic sales and 6 per cent of exports; for the next three years at 2 per cent of domestic sales and 4 per cent of exports; and thereafter at 1 per cent of domestic sales and 2 per cent of exports.

Tech collaborations

Existing regulations permit all companies, irrespective of the extent of foreign equity in the shareholding, to pay royalty of up to 5 per cent on domestic sales and 8 per cent on exports without any restriction on the duration of payment. This is applicable to technical collaborations with technology transfer. There is no need to take approval from the government. However, all payments will be subjected to FEMA (Foreign Exchange Management Act) Regulations.

The proposed regime does not prescribe any change in conditions related with royalty payment on use of trademarks and brandname of the foreign collaborator without technology transfer. It will remain at up to 2 per cent of exports and 1 per cent for domestic sales on use of trademarks and brandname of the foreign collaborator without technology transfer. However, in case of design, royalty payments shall be ‘capped at 1 per cent of domestic sales and 2 per cent of exports and shall be payable for a period of 10 years only.’

Interestingly, the Statement on Industrial Policy, 1991, tabled in Parliament in 1991, prescribed 5 per cent of royalty for domestic sales and 8 per cent for exports subject to total payments of 8 per cent of sales over a 10 year period from date of agreement or 7 years from commencement of production. This was applicable on automatic permission for any FDI proposal with lumpsum payment not exceeding ₹1 crore. This limit was raised to $2 million in 1996 and time limit for royalty payment was removed in 2003.

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