Anand Sharma for curbs on MNCs royalty fee

Written by PTI | New Delhi | Updated: Dec 23 2013, 04:51am hrs
Anand SharmaAnand Sharma
Worried over excessive outflow of foreign exchange as royalty and fees for technology transfer and use of brand names, the government is considering to re-introduce restrictions on such payments by foreign companies to their parent entities.

The excessive outgo should not be there. We are not saying that royalty will not go but we are looking at this issue as to how to address the sudden outgo of these funds. This needs a little bit of tampering, commerce and industry minister Anand Sharma told PTI in an interview.

Regarding this, he has written a letter to finance minister P Chidambram. There has to be a foolproof reporting of such funds, he added.

The increase in outflow of these payments started after the government liberalised the FDI policy in 2009. It had removed the cap and permitted Indian companies to pay royalty to their technical collaborators without seeking prior government approval.

The outflows on account of royalty and fee for technical services, taken together, are as high as about 16% to 33% of the foreign direct investment (FDI) inflows over the period 2009-10 and 2012-13. In the last fiscal, India had attracted FDI worth $22.42 billion.

Royalty is paid to a foreign collaborator for transfer of technology or the usage of brand.

In his letter to Chidambaram, Sharma said given the current economic situation and a high quantum of outflows on this account, there is a need to take a view on whether the ceiling on royalty payments and fee for technical services should be re-introduced in the FDI policy to check the large outflows and also to prevent possible misuse of this window.

FDI, which is essential to bridge the widening CAD, declined by about 15% to $12.6 billion (R74,971 crore) during the April-October period in the current fiscal.

The commerce and industry ministry also wants a proper post-reporting mechanism for technology transfer or collaborations and use of brand name.

The ministry has already sent a draft press note to the department of economic affairs and are awaiting the response.

Due to absence of such a mechanism, the exact payments made by Indian entities towards such payments are not ascertained from RBI.

As per media reports, car maker Marutis royalty payment to its Japanese parent Suzuki has increased to R2,454 crore in 2012-13 from R495.2 crore in 2007-08.

Before 2009, royalty payments were regulated by the government and was capped at 8% of exports and 5% domestic sales in case of technology transfer and fixed at 2% of exports and 1% of domestic sales for use of trademark or brand name.

To discourage higher royalty payments, the government had in the last budget hiked the rate of tax on royalty and fee for technical services paid to overseas entities by 15% to 25%.