‘Increase in royalty tax will curb tax avoidance, protect shareholders’

Priyanka Pani Mumbai | Updated on March 01, 2013

The increase in royalty tax to curb tax avoidance will help protect the interest of shareholders and help earn more tax revenues for the Government, feel proxy advisory firms and analysts.

The Budget proposal has increased the rate of tax on payments by way of royalty and fees for technical services to non-residents from 10 per cent to 25 per cent to check the prevalent anomalies.

“Arbitrage between royalty and dividend payout has decreased. The move will be shareholder and company neutral, as long as the tax is to be paid by the recipients,” said J.N. Gupta, founder of proxy advisory firm SES.

He further said foreign shareholders and technology agreement holders usually negotiate rates, which are net of taxes, that adversely affect the company and shareholders.

“This will impact parent companies and not Indian firms as they pay royalty after deducting the tax. Hence, no impact on HUL, but there will be an impact on Unilever PLC,” said an FMCG analyst.

Recently, companies such as Unilever and cement major Holcim had hiked royalty payments from their Indian companies. Investment bank Espirito Santo, in a report, said the move was motivated by tax avoidance.

Since deregulation in December 2009, royalty payments have risen 140 per cent. On an average, 25 per cent of net profits are paid out. About 25 companies, including Maruti and ABB, paid 25 per cent of profits as royalties to foreign promoters. Nestle India, Procter & Gamble India, Alstom T&D and BASF India all paid out 30-40 per cent of net profits, Espirito Santo added.

Published on March 01, 2013

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