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Tax on Royalty payments

Written By Admin on Saturday, 2 March 2013 | Saturday, March 02, 2013

The Government’s proposal to hike taxes on royalty payments will hurt profitability of Indian subsidiaries of international tech firms and will push up the cost of doing business. 

The Government has dealt a blow in the 2013-14 Budget by increasing tax on royalty payments from 10 per cent to 25 per cent.

Higher bearing

This will increase the cost of doing business for Indian subsidiaries in sectors such as technology, automobiles, pharmaceuticals, oil and gas and others, according to industry watchers. Further, this would have a higher bearing on companies based in foreign countries with which India does not have a tax treaty.

Further, this is in addition to the agreement that a subsidiary enters with a parent company.

“For example, in the case of a non-treaty country like Taiwan, the tax rates would go up by 15-16 per cent on top of the 25 per cent and this would be pushed down by the foreign company to the payer in India,” said Kaushik Mukerjee, Executive Director- Tax and Regulatory Services, PwC India. Others agree.

“This will deter inflow of technology and Intellectual Property Rights into India and will significantly enhance business costs, especially where the Indian subsidiary has to bear the tax,” said Himanshu Parekh, Partner, Global, International Corporate Tax, KPMG.

Varied taxes

However, the Finance Minister is insistent that the tax rates on royalty were lower than the rates as per Double taxation Avoidance Agreements (DTAA). While different firms pay varied taxes, depending on the kind of work undertaken, royalty fees are currently estimated to be in the region of 1–10 per cent. Emails sent to companies did not elicit any response but a Samsung executive said that it cannot comment on the impact as it is yet to study it.

Industry watchers are even sceptic about the silver lining that the Government has proposed wherein the entity by applying for a Tax Residency Certificate can apply for lower taxes. “This just increases bureaucracy and if you apply the same rules in a reversed scenario, do you think tax authorities abroad would comply?” asks Pranay Bhatia, Partner, Economic Law Practice.
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