The Central Government is mulling on the prospect of re-introduction of restrictions on the payment of royalty by Indian companies in relation to technology transfers by foreign companies.

The principal reason for this step can be attributed to an excess outflow of income generated out of technology transfers amid Indian entities and companies incorporated in foreign territories.

As per the available information, Department for Promotion of Industry and Internal Trade (DPIIT) may roll out a notification in this regard for consultation amid inter-ministerial departments.

Suitable restrictions may be placed on royalty payments which will be paid out of income earned through the technology transfer/collaboration between any foreign entity providing the technology and firm based in India availing it through a direct or indirect association.

DPIIT had come up with a proposal last year as well, which was on similar lines with the existing proposal. That proposal (a 7 year timeframe) had two dimensions – in the first leg, the royalty rate was proposed to be capped at 4% of domestic sales and 7% of exports for the first four years of seven year period – thereafter, the royalty payments were to be reduced to 3% on the domestic sales and to 6% on the exports for the next three years.

However, apparently the said proposal was shot down by the Finance Ministry apprehending it could negatively influence the sentiments of foreign investors.

Such rationalization of FDI policy had permitted the Indian entities to make royalty payments to their technical partners (Regional/Foreign) without the necessity of procuring the prior consent from the central government as a consequence of the elimination of the cap on royalty payments.

Prior to a rationalization of FDI policy in 2009 – Royalty payments were capped in relation to technology transfer (8% on exports and 5% on domestic sales) and brand/trademark usage (2% on exports and 1% on domestic sales).

Royalty is a form of incentives that will be paid to a technical collaborator for the transfer/grant of authorization to use such collaborator technology, brand or trademarks.

A balanced approach/restrictions on the royalty payments by Indian companies to entities incorporated in the foreign soil is required. The rates should be incentive enough for foreign technology providers, economical at the same time for the Indian recipients and Indian economy at large.