The Telegraph
Tuesday , March 18 , 2014
CIMA Gallary

Debate over high royalty payouts

New Delhi, March 17: The Maruti imbroglio has brought to the fore an issue that the tax department has long been pondering over — royalty payments to multinationals that often threaten to eclipse the profits of their Indian subsidiaries.

The taxation rate is lower on royalty payouts than corporate profits. Taxmen have argued that MNCs are raising the royalty rates charged to their Indian subsidiaries to siphon off what would have otherwise been treated as taxable profit.

Officials said the practice gained currency after the RBI removed a 5 per cent cap on royalty payouts to foreign firms. The move followed lobbying by MNCs that higher royalty should be allowed to encourage technology inflows.

Maruti pays about 5.7 per cent of its sales as royalty to Suzuki Motor. This means Maruti paid over Rs 2,100 crore in 2012-13 as royalty, slightly lower than its net profit of Rs 2,400 crore. In the last decade, its royalty payout was in the range of 3.5-4 per cent.

Holcim now gets a royalty of 1 per cent, up from 0.6 per cent, following a boardroom tussle with independent directors, who had objected to an even higher payout.

Last year, Hindustan Unilever had announced plans to increase its total royalty payout to 3.15 per cent by March 2018 from 1.4 per cent now. In 2012-13, the consumer products giant had sales worth Rs 25,810 crore. At 1.4 per cent, the royalty translates to Rs 361 crore. At 3.15 per cent, this would have been Rs 877 crore.

“The reduction in profits because of transfer of part of the company’s income through royalties and technical fees are favourite tactics of MNCs world over and that is why the cap had been put in place. If we feel the decision to remove the cap is being abused, we will study the matter afresh,” the officials said.

This is how it works. A transnational firm raises the royalty paid on the net sales by its Indian subsidiary. The increases add to the multinational’s profit but reduces the Indian subsidiary’s taxable profits. This leaves Indian shareholders and tax authorities poorer.

Finance ministry officials said global norms followed by independent entities had to be examined to curb high royalty. Globally, analysts say, software companies charge 15-25 per cent as royalty, tool manufacturers 3-7 per cent, baby goods makers 5-7 per cent and biotech firms 50 per cent.

“Usually new proprietary technologies attract higher royalties and older technologies attract lower or even zero royalties. Sometimes, to make a product popular or to keep its price low, the royalty rate is lowered,” explained officials.

According to officials, though China has removed the caps on royalty payouts, tax authorities there refuse to consider royalty payments in cases where a foreign company earns profits below the benchmark.