A surge in royalty outflow has 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. Royalty is paid to a foreign collaborator for transfer of technology, usage of brand or trademarks.
“Royalty outflow has surged in the recent past and it needs to be analysed. So, the government has set up this inter-ministerial panel,” an official said. The panel will be headed by an additional secretary level officer of the Department of Industrial Policy and Promotion (DIPP). It also has representatives from departments of revenue, economic affairs and the Reserve Bank. It will submit its report by June.
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The terms of reference includes scrutiny of the outflow and the present legal structure dealing with royalty payments and transfer pricing. Earlier, the DIPP had raised serious concerns over the increasing outflow of such payments. The department had proposed re-introduction of restrictions on such payments by companies to their parent entities.
It 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.
According to industry experts, it will be very difficult to assess the right quantum of royalty to be paid by domestic companies to foreign parent firms. The increase in outflow of these payments started after the government liberalised the FDI (foreign direct investment) policy in 2009.
It had removed the cap and permitted Indian companies to pay royalties to their technical collaborators without seeking prior government approval. The outflows on account of royalty and fee for technical services, taken together, are estimated to be as high as 15-18 per cent of the FDI inflows over 2009-10 and 2012-13.
As per available data, royalty payment increased to USD 4.1 billion in 2012-13, from USD 1.7 billion in 2008-09. FDI, which is critical to bridging the widening current account deficit, grew 22 per cent to USD 35.84 billion during April-December of the last fiscal.
Before 2009, royalty payment was 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 and was fixed at 2 per cent of exports and 1 per cent of domestic sales for use of trademark or brand name.
Auto major Maruti Suzuki pays an average royalty of around 5.5 per cent of its net sales to its parent Suzuki. It has begun making payments to Suzuki in rupee instead of yen for new models starting with compact SUV Vitara Brezza to bring down royalty outflows.
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.