Thousands of companies that have foreign collaborations, and many more that will do so in future, stand to benefit as the government plans to free payment of royalty for use of trademark or brand and of technology transfer fees.
At present, if the technology transfer fee exceeds $2 million, it has to be approved by the Projects Approval Board, under the Ministry of Commerce and Industry.
For royalty, the limit is 5 per cent of domestic sales and 8 per cent of exports. If there is no transfer of technology, royalty is capped at 1 per cent of domestic sales and 2 per cent of exports.
Since 1991, when the country started to liberalise its economy and industry, the government has approved 8,035 technology collaborations between Indian and foreign companies, the bulk of them with companies in the United States, Germany, Japan, the United Kingdom and Italy.
A draft Cabinet note prepared by the Department of Industrial Policy & Promotion, under the commerce ministry, proposes to put such payments on the "automatic route" without restrictions and subject only to the Foreign Exchange Management Act (Current Account Transactions) Rules of 2000.
The Cabinet note has gone to the Cabinet Committee on Economic Affairs, which is expected to take it up soon.
DIPP's move has been endorsed by both the Planning Commission as well as the Department of Economic Affairs, both of which play critical roles in such policy decisions.
The current policy was formulated in 1991, when the country faced a severe shortage of foreign exchange and had to mortgage its gold. It was relaxed a little in 1996, but remained strict.
According to DIPP, the situation has changed significantly, with the country sitting on foreign exchange reserves of over $300 billion. Therefore, the department says, there is no justification for any restriction on payment of royalty.
It has also argued that in a globalised economy the evaluation of technology and assessment of quality and justification for the knowhow and royalty payment need to be left to commercial considerations of the parties entering the contract. The issue should not be in the domain of the government.
However, such payments involve foreign exchange outflows, which are administered through FEMA rules, that decide which transactions cannot be allowed and which require approval of the Reserve Bank of India.