Expanding the Definition of Royalties: The Tax Impact on Digital Payments

The growth of the digital economy has changed how businesses pay for technology, software, and payment solutions.

The Finance Act, 2026 introduces a significant change by expanding the definition of royalties under the Income Tax Act to capture certain digital-related payments.

What Is a Royalty?

A royalty is generally a payment made for the use of, or the right to use, intellectual property, technology, specialised knowledge, or similar rights.

Traditionally, royalties covered copyrights, patents, trademarks, software rights, and technical information or know-how. However, the digital economy has created new forms of payment that do not always fit within traditional categories.

What Digital Payments Are Now Covered?

The Finance Act, 2026 expands the definition of royalties to specifically include payments relating to:

• The use of, or the right to use, proprietary digital payment card networks and platforms
• Digital payment processing systems
• Network fees and processing charges connected to these platforms

The Withholding Tax Impact

Once a payment is classified as a royalty, it attracts Withholding Tax obligations. 20% WHT may apply to royalty payments made to non-residents, while 5% WHT may apply to royalty payments made to resident persons.