India tax: Policy on royalty payments to be liberalized

The Indian Union Cabinet approved on 5 November 2009 a proposal to remove the current ceiling on royalty payments made to foreign collaborators. The measure, proposed by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, will permit "automatic route" payments for royalties, lump sum fees for technology transfers and payments for the use of a trademark or brand name to be made without restriction.

Currently, payments for foreign technology transfers are subject to a cap of USD 2 million for lump sum payments and 5% of domestic sales and 8% of export sales for recurring payments under the automatic route (meaning that no prior approval is required for the payment). The caps for payments for trademarks/brand names are 1% of domestic sales and 2% of export sales for recurring payments.

The government will be developing a reporting mechanism to obtain information about the nature and details of technology and the amounts paid.

Elimination of the ceiling will enable foreign companies to re-examine their existing arrangements and seek a higher royalty payment from their subsidiaries/JVs in India. Any restructuring of arrangements, however, should comply with the arm's length principle under India's transfer pricing rules. From an exchange control perspective, this is a significant move towards the free convertibility of the Indian rupee.