A couple of months ago, we had discussed the corporate governance issues that emerge when Indian subsidiaries of multinational companies pay substantial amounts to their parents in royalty.
While we will have a chance to discuss the taxation issues in the Budget in greater detail, the proposal to increase taxation on such royalty payments stands out. The Finance Minister’s speech notes:
147. 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. Hence, I propose to increase the rate of tax on payments by way of royalty and fees for technical services to non-residents from 10 percent to 25 percent. However, the applicable rate will be the rate of tax stipulated in the DTAA.