There’s a case for heavy taxes on royalties that MNC units pay their parents

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Subscribe to enjoy similar stories. Even as revenue growth for companies in India has reduced its pace to a canter, royalty payments sent abroad by several Indian offshoots of multinational companies (MNCs) are galloping ahead. In several cases noted by market regulator Sebi, royalty payments exceed dividends.

In fact, the higher the firm’s expense on royalty payments, the lower the profit and thus lower the possible dividend outgo from it. In 2023, the Indian government increased the withholding tax on royalty payments and fees for technical services from 10% to 20%. In fact, there is a strong case for raising the normal tax on royalty payments to the applicable corporate-tax rate.

On some types of royalty-payment hikes that have no rational basis, the tax rate on the incremental payout could go as high as 100%. To curb excesses in this practice, it is not enough for Indian rules to require that locally listed units of MNCs get shareholder approval for raising royalties. Accountability to equity holders needs to be equitable and sharp, no doubt, but we need fiscal action as well.

All royalty claims are not equal. Those paid for intellectual property (IP) licences are the most legitimate. Patents and other forms of IP have a definite life expectancy; by the time they expire, companies are expected to have fully recouped their investment in them and earned a decent return.

While trademarks need renewal, a brand name with special consumer appeal might be what sets a product apart from its competitors. In such cases too, brand strength may justify a royalty. But when it comes to brands that most of us can hardly even recall, let alone identify with or value, the logic weakens.