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When a distinctly indigenous B2B brand like National Stock Exchange gets its theme song registered as a ‘sound mark’, the auditory version of a trademark, you know that India’s intellectual property (IP) consciousness is coming of age as the world transitions from manufacturing to knowledge economy.
But realising the potential of its IPs will be a long, arduous road, just as it was for China. In 2008, India’s northern neighbour started transforming itself from ‘wild west’ of IPs engaged in low-value manufacturing, to becoming a global industrial powerhouse. It set a strategic goal of attaining high levels of creation, utilisation, protection and administration of IP rights, and in 2015 filed the highest number of IP applications. In 2019, it filed 25 times more patent applications than India, and two times more than US. In 2019, it was granted 64 lakh-plus trademarks and more than 5.5 lakh design rights, while India was granted 2.94 lakh trademarks and about 12,000 design rights, as per data from Department of Promotion of Industry and Internal Trade.
It is time for India to learn IP kung-fu moves from its neighbour as using IP created by foreign entities is proving to be costly. As per IMF Balance of Payments data, India paid $8.63 billion for use of foreign IP in 2021, 56,862% more than $15.1 million in 1981. In comparison, IP owned by Indian entities netted merely $870.1 million. This underlines the need to improve IP protection laws and systems to encourage creation of IP by Indian entities. In 2021, the Parliamentary Standing Committee on Commerce said a mere 1% improvement in copyright protection increases foreign direct investment (FDI) by 6.8%. The same improvement in protection for patent and trademark increases FDI by 2.8% and 3.8%, respectively.
There has been some improvement in the situation, though. Four decades back, India paid 80 times more for use of foreign IP than what it earned from its own IP. Though this fell to 10 times in 2021, it’s clear that the country continues to pay a heavy price for not creating enough IP assets.
The Cost of IP
IP rights (IPR) can be classified into industrial IPRs, marketing IPRs and creative IPRs. Industrial IPRs stem from knowledge and research and include patents, trade secrets, technical knowledge and industrial design. Marketing IPRs result from marketing efforts that build the value of trademarks, product-design, etc. Creative IPRs include copyrights of creative products such as books, cinema, performance by artistes, software, etc. As per Fortune India-CapitalLine data, India Inc. paid ‘Royalty And Technical Know-How Fees’ of ₹46,447 crore in FY21 versus ₹43,710 crore in FY20, a rise of 6.2%. This is exclusive of metal, mining and petrochemical sectors that pay mineral royalty to government of India.
There are two means by which an Indian subsidiary pays its parent entity on foreign soil — royalty and dividend. Royalty is charged as percentage of sales revenue whereas dividend is paid on profit after tax. Hence, royalty is probably a better way to ensure bigger pay-outs. Royalty also reduces taxable profits of subsidiaries, hence their overall tax burden.
Companies usually prefer to receive royalty in a country with lower tax rates. A small part of that royalty is then paid to the parent entity in higher tax jurisdictions. For instance, many multinational companies based in high tax regions like G7 and Organisation for Economic Co-operation and Development (OECD) nations prefer to form R&D companies in low corporate tax countries like Ireland (12.5%), Cyprus (12.5%) and Cayman Islands (Nil). Tax Foundation, a non-profit tax research organisation, says average corporate tax rates in G-7 and OECD nations were 26.69% and 23%, respectively, in 2021.
Questionnaires sent by Fortune India to Kia Motors, Hyundai Motor India, Wipro Ltd., Tata Steel, Maruti Suzuki and Herbalife International India about royalty payments did not elicit any response. Here’s what the major sectors of the economy are paying as royalty.
IT Sector: IT companies were among the top 10 payers of royalty and technical knowledge fee from FY19 to FY21. They paid ₹18,234.54 crore in FY21, as per Fortune CapitalLine data. Wipro paid the most, ₹8,360.90 crore, followed by Microsoft Corporation India, which paid ₹5,361.8 crore. IBM India paid ₹2,709 crore.
Consumer Goods & Services: The branded consumer goods and services segment also pays heavily for using foreign brand names. An analysis of Fortune India-CapitalLine data shows that companies belonging to sectors like FMCG, consumer durables, alcoholic beverages, hotels, F&B, readymade garments, textiles, mobile handsets, and companies trading in these goods and services, paid more than ₹5,836.45 crore for royalties and technical knowledge in FY21. Many brands of companies like Hindustan Unilever, Proctor & Gamble and Colgate Palmolive have been in India since colonial times, so it may be presumed that, for three-quarters of a century, the Indian consumer has been indirectly paying huge amounts to foreign companies, largely for the brand perception. Even the relatively new consumer brands like Xiaomi and McDonalds have found Indian mass market a great source of royalty income (see Xiaomi Tops Among Trading and FMCG Firms).
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