Mumbai, Feb. 28: Finance minister P. Chidambaram today announced a hike in the rate of tax on royalty to 25 per cent from 10 per cent, a move that could impact the bottomlines of Indian subsidiaries of multinational companies.
The announcement comes at a time select firms have increased the royalty payments to their foreign parents. Last month, FMCG giant-Hindustan Unilever had announced that it would pay higher royalty to its Anglo-Dutch parent Unilever Plc in a phased manner. The royalty cost, which now stands at 1.4 per cent of its turnover, will increase in a staggered fashion to 3.15 per cent by March 31, 2018, it had then said.
Similarly, both ACC and Ambuja Cements had won shareholder approval for paying higher royalty to their Swiss parent Holcim. The technology and know-how fee payable by both these companies stands at 1 per cent of net sales, higher than the earlier level of around 0.7 per cent.
With such instances growing, many observers had expected Chidambaram to tap this route to extract more revenue for the government.
“Another case is the distribution of profits by a subsidiary to a foreign parent company in the form of royalty. Besides, the rate of tax on royalty in the income tax act is lower than the rates provided in a number of double tax avoidance agreements (DTAA). This is an anomaly that must be corrected. Hence, I propose to increase 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. However, the applicable rate will be the rate of tax stipulated in the DTAA’’, Chidambaram said while announcing the higher tax on such royalty paid.
Capital market analysts said while companies in varied sectors paid royalty to their parent, the impact would depend on the fees paid. Some feel that both HUL and Maruti Suzuki will be impacted because of the proposal. However, V. Srinivasan, FMCG analyst at Angel Broking, told The Telegraph that the impact on HUL would not be “material’’.
The announcement however, led to shares of these companies taking a hit at the stock exchanges.