The Department of Industrial Policy & Promotion
("DIPP") is working on a discussion paper to re-consider
the cap on royalty payments to foreign partners/parent companies.
The Telecom Regulatory Authority of India ("TRAI") has
suggested increasing the license fee applicable on Internet Service
Providers ("ISP") from the existing 6% to 8%.
1. Re-discussing the royalty payment issue
The DIPP is likely to bring a discussion paper for review of the
proposal on 50% rise in royalty payments by Indian companies to
their foreign partners or parents. So, essentially, the paper will
invite comments on whether or not the royalty ceiling applicable
till 2009 should be re-imposed. Know that until December 16, 2009,
lump sum royalty payments were capped at $2 million. For the cases
where there were no flat rates, royalty payment for technological
collaboration was capped at 5% of the domestic sales and 8% of
exports. Further, for the usage of a brand name, royalty could be
paid up to 1% of sales and 2% of exports. Beyond these levels,
approval of the Foreign Investment Promotion Board was
PSA view - Seeing the great increase in
payments to foreign companies in royalty payments, DIPP is mooting
the present step. The outflow of royalties has increased as most of
the sectors have been opened for foreign investment or cap
increased.In the budget of FY 2013-2014, the withholding tax on
royalties paid by Indian companies to their foreign parents was
increased from 10% to 25% but an exception was carved out for those
companies with which India has double taxation avoidance treaty. As
India has this treaty with more than 80 countries the increase in
tax rate had no implication. Further, the new Companies Act, 2013
has tried to tighten the rules on royalty payments, wherein section
188 has made it mandatory that all related-party transactions be
passed through a special resolution, requiring consent of 75% of
2. Increase in license fee on ISP
TRAI has suggested increasing the license fee applicable on ISP
from the existing 6% to 8%. According to TRAI, it will help
the government plug loss of revenues accruing to it from ISPs who
have not yet rolled out services, despite obtaining the spectrum in
2010. TRAI has also suggested a new definition of revenue for ISPs
on which the government should levy 8% annual fee. ISP licenses
must cover all kinds of revenue from internet services, allowing
for only deductions available for pass through charges and
taxes/levies like in the case of access services, without any
set-off for expenses.
PSA view - TRAI had earlier recommended that
the government should levy 8% license fee from April 1, 2013 but
there were some questions raised on revenue items that should be
considered for calculating final charges. The flip side of raising
the license fee can be adverse on ISP which are already losing
revenues to mobile operators, such step could further hurt their
profitability in near future as well.
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