The Finance Act, 2026 expands the definition of "royalties" under the Income Tax Act to include certain digital-related payments, reflecting the growth of the digital economy.
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 areas such as copyrights, patents, trademarks, software rights, and technical information and know-how.
What Digital Payments are Now Covered?
The Finance Act, 2026 expands the definition 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 (WHT) Impact
Once a payment is classified as a royalty, it attracts Withholding Tax obligations. Businesses making these payments must consider:
- Payments to non-residents: 20% Withholding Tax may apply on royalty payments made to foreign companies, technology providers, and global digital platforms.
- Payments to residents: 5% Withholding Tax may apply on royalty payments made to resident persons.
Who is Most Affected?
The changes are particularly important for Banks and financial institutions, Fintech companies, E-commerce businesses, companies using foreign technology platforms, and businesses making payments for digital solutions.
Why Does This Matter?
The amendment increases the focus on taxing value generated from the digital economy. Businesses should now review existing contracts with technology providers, the nature of digital service payments, WHT obligations before making payments, and documentation and compliance procedures.
As digital transactions continue to grow, understanding tax changes is critical for avoiding unexpected liabilities.