MNCs to pay more tax on royalty earned from Indian subsidiaries

Another case is the distribution of profits by a subsidiary to a foreign parent company in the form of royalty.

Multinational companies operating in India will have to pay more tax on royalty they earn from their Indian subsidiary,as the government has announced an increase in the tax on royalty and fee payments made by Indian subsidiaries to foreign parent from 10 to 25 per cent.

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 per cent to 25 per cent, finance minister P Chidambaram announced in Parliament. India has tax treaties with 84 countries,majority of tax treaties allow India to levy tax on gross amount of royalty at rates ranging from 10 per cent to 25 per cent,whereas the tax rate as per section 115A is 10 per cent.

Payment of royalty and technical fees has been a bone of contention between minority shareholders and MNCs in the recent past. Shares of many multinationals witnessed sharp fall after the board decided to increase royalties and technical fees from India.

Analysts,who also fear that the parent company may pass on this increase in tax on the Indian subsidiary,have given a thumbs down to the proposal. The hike in withholding tax rates on royalty and fees for technical services from 10 per cent to 25 per cent is not positive in terms of signals,though,in practice,the tax treaty rates which are usually between 10 per cent to 15 per cent in most cases,should apply, said Ketan Dalal,joint tax leader at PwC India.

Another announcement by the government to set up a Tax Administrative Reform Commission TARC has been welcomed but there is a lot of ambiguity on its implementation.

When asked for clarity on the issue,Finance minister P Chidambaram said: If there is ambiguity on the TARC,we will clarify later..