The Retail sector is currently the hotbed of economic growth. Retail in India has grown dramatically over the last two decades, with rising disposable income, shift in youth populous and an attitudinal shift in consumer preferences. The retail sector accounts for 10% of India’s GDP and makes the country the fifth largest global destination in retail.
The Government has made its mandate on improving the business climate in India, fairly clear. This has been backed by several regulatory measures inter-alia easing sourcing norms and permitting wholesale trading for entities undertaking Single Brand Retail Trading in India.
While the Government has taken steps to provide a push to the regulatory aspects in the sector, the industry will look at being provided with necessary impetus from a tax perspective:
INCREASE IN INDIVIDUAL SLAB RATES
Possibly one of the most crucial drivers to the Indian Retail success story is the growth in income. Average household income is set to triple by 2020 from the amount it stood at in 2010. However, inflation has risen steadily as well over the period from 2010 and 2016. Keeping these factors in mind, increasing slab rates is a crucial consideration which the Government should contemplate especially for the lower / mid-income populace.
EMPLOYMENT RELATED BENEFITS
The retail sector currently employs around 8% of the total workforce of the country. A profit linked incentive should a long way in creating an impact on the employment numbers in the country.
REMOVING INEFFICIENCIES IN CURRENT INDIRECT TAX REGIME AND ROLL OUT OF GST
Inefficiencies in the current indirect tax regime, for instance, excise duty paid is cost to the retailers, double taxation of franchisee fee i.e. both VAT and service tax levied, CST treated as a cost on inter-state sale of goods and service tax paid on service availed like commercial rent, etc. being non-creditable serve as setbacks for the industry. The Government could consider resolving the same at least to the extent of double taxation and reducing the CST rate. Further, in a move to provide thrust to small retailers the Government could consider providing exemption of service tax on commercial rent upto certain limit.
The major focus of the current Government is to roll out the long pending GST provisions. This should reduce prices with a curb on cascading effect of indirect taxes in the value chain and should go a long way in bringing certainty, reducing inflation and bettering market sentiment.
BEPS AND SIMPLIFICATION OF THE TRANSFER PRICING REGIME
Being part of the G20, India has been extremely active on the Base Erosion and Profit Shifting (BEPS) project. While it seems clear that the Government is set to bring in BEPS measures into the India Tax Policy, it will be interesting to see how the measures such as country-by-country reporting will take shape and more importantly in what form.
With large MNCs setting shop in India are only set to increase spending on marketing, franchisee, advertising, sales promotion and royalty. The Government must look to build on its policy of reducing unwarranted litigation on transfer pricing aspects by prescribing guidelines on the same.
While the climate in India seems favourable and the compass points towards promise, it will be crucial to see what the FM provides the sector. With BEPS and GST in the pipeline, there is little doubt that the tax climate is changing quickly. The unenviable task of the FM will be to manage the fiscal deficit and balance tax policy in a way so as to not disrupt foreign investment, the latter, being the most crucial!
Authored by: Paresh Parekh, Tax Partner – Retail & Consumer Practice, EY India
(Rahul Kakkad, Senior Tax Professional, EY also contributed to the article)