Government considering restrictions on royalty payments

By: |
New Delhi | July 31, 2018 5:11 PM

The government is considering restrictions on royalty payments for technology transfer in view of excessive outflow of such funds to overseas companies, sources said.

royalty payments, FDI policy, Maruti Suzuki, domestic sales,commerce and industry ministry, Indian companiesThe commerce and industry ministry has proposed limits on royalty payments in case of technology transfer or collaboration involving foreign entities either directly or indirectly through any firm in India.

The government is considering restrictions on royalty payments for technology transfer in view of excessive outflow of such funds to overseas companies, sources said. The commerce and industry ministry has proposed limits on royalty payments in case of technology transfer or collaboration involving foreign entities either directly or indirectly through any firm in India. The proposal will be circulated for inter-ministerial views, the sources said. As per the proposal, such payments should be capped at 4 per cent of domestic sales and 7 per cent of exports for the first four years; and for the next three years the limits should be 3 per cent of local sales and 6 per cent of exports.

For further three years, these payments should be capped at 2 per cent of domestic sales and 4 per cent of exports and thereafter at 1 per cent of local sales and 2 per cent of exports. With regard to use of trade mark and brand names, the ministry has proposed to cap royalty payments at 1 per cent of sales and 2 per cent of exports of an entity.

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

In April last year, a surge in royalty outflow prompted the government to set up an inter-ministerial group to analyse payment norms and see whether there is excessive payout by Indian companies to foreign collaborators. Proposing these restrictions, the ministry had argued that the curbs would help increase the profits of domestic companies, mainly in the automobile sector, prevent depletion of foreign exchange reserves, protect interest of minority shareholders and increase revenue for the government.

Before 2009, royalty payments were regulated by the government and capped at 8 per cent of exports and 5 per cent domestic sales in the case of technology transfer collaborations. They were fixed at 2 per cent of exports and 1 per cent of domestic sales for use of trademark or brand name. Telecom companies too pay USD 15 royalty for every mobile line. A single line ideally supports a single call at a given point of time. Similarly, Auto major Maruti Suzuki pays an average royalty of around 5.5 per cent of its net sales to its parent Suzuki.

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