Budget 2013 saw a steep hike in the tax rate on royalties and fees for technical services that an Indian company pays to a NRI or a Foreign Company.

Budget 2013 saw a steep hike in the tax rate on royalties and fees for technical services that an Indian company pays to a Non Resident Indian or a Foreign Company. The rate went up from 10 per cent to 25 per cent.

This was done in order to correct an anomaly. The rate of tax on royalty in the Income-tax Act was lower than the rates provided in a number of Double Tax Avoidance Agreements.

So who does this impact?

NRIs receiving royalties

Royalty essentially means any payment made where the original property is retained by the owner and only the right to use is licensed out to the user. According to the Income Tax Act, in the context of this clause, "royalty" means consideration for any of the following:

- the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property

- the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property

-the use of any patent, invention, model, design, secret formula or process or trade mark or similar property
- the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill

- the use or right to use any industrial, commercial or scientific equipment

- the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films

-the rendering of any services in connection with the activities referred to above

NRIs receiving fees for technical services

"Fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration that may come under the head "salaries."