Budget expectations of the retail industry

One of the issues that managed to garner massive attention in 2011 was Foreign Direct Investment (FDI) in the Indian retail sector. The UPA government finally allowed 51 per cent FDI in multi brand retail. However, the government had to put off its decision amidst fierce opposition by a few sections of the society and pressure from other political parties. The government has, however, been successful in coming out with a press note on allowing 100 per cent FDI in single brand retail, subject to adherence to 30 per cent of the sourcing restriction from the small industries of India. The foreign players would like the government to relax the sourcing restrictions either in terms of allowing sourcing from anyone in India, irrespective of size, or waive this condition entirely. As the government has recently made an attempt to introduce FDI in multi brand retail, the industry is not expecting any kind of positive announcement in multi brand retail in the coming budget. However, as FDI in multi brand retail has been portrayed as a panacea for curbing inflation, the industry and consumers are looking forward to hear the alternative measures that the government may have planned to curb inflation.

Need for bestowing industry status

The retail sector is one of the most significant sectors of the economy. There is an urgent need for granting industry status to the retail sector in order to ensure smooth availability of finances.  Most of the retailers are currently crippled with short availability of funds for financing its huge working capital needs. This will trigger consolidation amongst the organised players. The government should also consider appropriate changes in the foreign exchange laws to enable retailers to borrow money in foreign currency for funding their expansion plans. Extension of Income Tax benefit of Section 72A, which deals with carry forward and set off of accumulated loss and unabsorbed depreciation in case of amalgamation or demerger, may also be extended to the retail sector to facilitate mergers and acquisitions.

Slashing down corporate tax rate desirable

Given the current economic downturn, the government should consider reducing the corporate tax rate, which is currently 30 per cent. This will help in improving the financial health of retailers by reducing the cash outflow, which can be re-invested for addressing future business needs.

The retail sector is driven by high consumer demand. The Finance Minister should consider bringing down the maximum marginal tax rate in the hands of individuals or raising the maximum bracket for levy of the tax rate of 30 per cent, which would help in increasing the purchasing power and assist in fuelling growth of the retail sector.

Although the Direct Tax Code (DTC) is not expected to be brought in this coming budget, the industry is hoping for an announcement on the likely time period within which DTC can be rolled out. 

Excise duty: another pain point for apparel retailers

The government should also re-look at its earlier decision of levying of excise duty on branded readymade garments. The government had imposed 10 per cent central excise levy in the Union Budget of 2011. The levy was justified as a transitory step to GST. The imposition of excise duty has happened at a time when the industry is under a severe margin pressure on account of rising interest costs, raw material inflation, high freight and Octroi costs, rising marketing expenses and VAT. Consequently, the industry has no option but to pass on the increased tax cost to the consumers. There has been a strong consumer resistance against the increase in prices, resulting in a significant drop in demand, thereby forcing the retailers to resort to extended discounting – creating further stress on margins that are already under severe pressure.

The branded garment industry provides employment to lakhs of semi-skilled labours and this drop in demand may result in adverse impact on the employment of these workers. It is expected that instead of the current duty levy of 10 per cent on branded garments, excise duty at 1 per cent may be levied – in line with 130 items on which a similar levy was imposed in Union Budget 2011, as a precursor to GST. This will provide appropriate relief to the industry and be in line with the rollout of GST.

Currently, the small scale industries (SSI) enjoy exemption with respect to payment of excise duty if the turnover during the previous financial year does not exceed  `400 lakh. The eligible SSI need not pay excise duty for their first clearance of  `150 lakh (provided no Cenvat credit is availed). The government should consider increase in eligibility turnover in the previous financial year from  `400 lakh to  `500 lakh along with a proposed increase in the basic exemption from  `150 lakh to  `200 lakh/  `250 lakh.

Service tax hassle and GST uncertainty

Cost of service tax has always been a major pain for the retail sector. Retailers are not eligible to avail credit of service tax paid on input services resulting in additional cost. This increased cost is passed on to the consumers. Input service tax cost is expected to increase with the introduction of the concept of negative list of services (which proposes to widen the scope of levy). Special measures should be introduced for the retail sector to reduce such costs, as the sector is already reeling under pressure due to high tax cost burden. 

Further, as there is no certainty on the time line for the introduction of GST, it would be beneficial if the concessional rate of CST to eligible dealers is reduced
to 1 per cent from the existing 2 per cent.

(The author is Tax Partner,
Ernst & Young; Nidhi Kansal, Senior Tax Professional,
Ernst & Young, also contributed to the article.
Views expressed are personal )