Budget 2013: Higher royalty to hit MNCs' Indian arms

NEW DELHI: Profitability of Indian arms of multinationals will be squeezed as the government proposed to hike the rate of tax on royalty to 25 per cent for getting technical support from their parents.

The rationale behind raising the rate from 10 per cent earlier is to plug the gap of "tax avoidance arrangements", Finance Minister P Chidambaram said in his Budget speech.

"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," Chidambaram said.

"Some tax avoidance arrangements have come to notice ... 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. This is an anomaly that must be corrected," Chidambaram added.

However, the applicable rate would be the rate of tax stipulated in the Double Taxation Avoidance Agreement (DTAA).

A slew of companies spanning across different sectors including FMCG, cement, automobiles, pharmaceuticals, telecom, IT0 and oil and gas will be hit with the proposal.

The impact would vary from companeis to companies and it would all depend upon the rate of royalty they pay to their foreign parents for availing technical support.

Companies which are likely to receive the most severe hit out of the proposals are Maruti Suzuki and Hindustan Unilever. The FMCG firm has earlier proposed to pay royalty at the rate of 3.15 per cent of its revenue in phases through the year ending March 2018 from 1.4 per cent now will receive the most severe hit.

Among cement firms ACC and Ambuja Cements, in which Swiss building material major Holcim holds the majority stake, pay one per cent of their net annual sales to the foreign parent towards payment of technology and knowhow fees.