Provide start-up benefits to retail sector, incentivise capital outlay
The booming Indian economy, shift in demographics, and higher disposable income, amongst other factors, have led to the spurt in the sector.
- Feb 19, 2016,
- Updated Feb 19, 2016 1:16 PM IST
Recognising the importance of the retail sector in India's growth story, the Narendra Modi government brought about several relaxations in the exchange control policy to promote foreign direct investment (FDI) in the sector. 100 per cent FDI is now permitted in single brand retail and 51 per cent in multi-brand retail. However, to truly give an impetus to the sector, the industry will look at the government to bring about corresponding amendments during the Union Budget as well. Some of the industry's expectations would be: Reduction In Corporate/ Individual Tax Rates
The growth of the retail sector is largely dependent on the disposable income of its consumers. Given the rising rate of inflation, increasing the personal tax slab rates and reducing the maximum marginal rate of taxation to 25 per cent, resultantly increasing the spending power of consumers, would provide a much needed impetus to the sector.
The Finance Minister in his previous budget had announced that tax deductions/ exemptions shall be phased out, followed by a corresponding reduction in the corporate tax rates. While the retail sector is not eligible to claim any specific tax deductions/ exemptions, the reduction of corporate tax rates will provide additional cash flows, which can be employed in the business.Investment-Linked Incentives For Retail Infrastructure
Investment in retail infrastructure such as malls, shops, supermarkets, warehouses, etc. requires significant capital outlay. Investment-linked incentive of upfront deduction of 150 per cent/ 100 per cent capital expenditure is currently available for various sectors such as hospitality, healthcare, etc. However, a similar benefit is not available for the retail sector. The government should extend such incentives towards the retail sector as well, providing a much needed thrust to investment in retail infrastructure.Introduction Of GST And Efficiencies In Indirect Tax Regime
Rental expenses contribute majorly to the operational cost of retailers. These retailers occupying rental premises have to incur service tax on such rents. Given that the retailers are predominantly engaged in the sale and distribution of goods to the ultimate customer, the output liability is generally restricted only to VAT and not service tax. In view of the same, service tax paid on input services including rent is not available as credit, thereby increasing the cost of operations.
In order to mitigate this challenge, appropriate changes may be done in the credit rule so as to specifically provide beneficial relaxation to retailers. Also, rules should provide credit of services availed by the stores to manufacturer/ retailer. Alternatively, abatement may be provided to the service category of 'renting of immovable property', so that there is an effective reduction in the service tax paid on renting, thereby minimising the cascading effects.
The levy of service tax on reimbursements towards electricity charges is also not creditable to the retail sector thereby increasing the burden of cost.
The industry would look forward for specific exemptions that may be provided so that such reimbursements of electricity charges made by the retailers to their landlords/ lessors do not attract service tax.
GST would be a game changer for the retail industry as the issue of non-creditable taxes would be put to rest thereby bringing in tax efficiency. Tax Incentives For Consolidation
There has been substantial increase in M&A activity in the retail and consumer sector. As of May 2015, the total deal value in these sectors stood at $1 billion. However, there are certain tax hurdles for amalgamation of retail companies that the government should address in the upcoming Budget.
Currently, the benefit of carry forward and set off of accumulated loss of an amalgamating company engaged in retail is not available for an amalgamated company. In order to ensure positive growth in the sector, the government should extend such benefit to a retail company merging with another company as well. Extend Benefit For Start-Ups To Retail Sector
The government recently unveiled its flagship initiative 'Start-up India' detailing policy measures to promote and incentivise start-ups in India. While relaxation in FDI norms would encourage the foray of foreign brands in India, it is equally important to provide an environment for Indian start-ups to invest in and create global Indian brands. To start with, the government could consider clarifying the definition of a start-up to include persons investing in developing a retail brand in India. Benefits accorded to start-ups would automatically apply to such domestic investors as well. The proposed three-year tax holiday, fast track patent registration, credit guarantee fund, etc. will provide a level playing field to Indian retailers against MNCs for their sustainable development and an opportunity to foray into the global retail markets.
The present Central government after coming to power has taken several steps for a non adversarial and stable tax regime such as clarifications by way of circulars, accepting favourable tax rulings, increase of thresholds for departmental appeals, etc. The actions of the government have given a boost to the investor sentiments in various sectors including the retail sector. The government, by introducing the aforesaid changes, will further stimulate the retail sector, which shall be in alignment with its goal of improving India's Ease of Doing Business ranking as well.
The author is Tax Partner, EY India. Views expressed are personal
Recognising the importance of the retail sector in India's growth story, the Narendra Modi government brought about several relaxations in the exchange control policy to promote foreign direct investment (FDI) in the sector. 100 per cent FDI is now permitted in single brand retail and 51 per cent in multi-brand retail. However, to truly give an impetus to the sector, the industry will look at the government to bring about corresponding amendments during the Union Budget as well. Some of the industry's expectations would be: Reduction In Corporate/ Individual Tax Rates
The growth of the retail sector is largely dependent on the disposable income of its consumers. Given the rising rate of inflation, increasing the personal tax slab rates and reducing the maximum marginal rate of taxation to 25 per cent, resultantly increasing the spending power of consumers, would provide a much needed impetus to the sector.
The Finance Minister in his previous budget had announced that tax deductions/ exemptions shall be phased out, followed by a corresponding reduction in the corporate tax rates. While the retail sector is not eligible to claim any specific tax deductions/ exemptions, the reduction of corporate tax rates will provide additional cash flows, which can be employed in the business.Investment-Linked Incentives For Retail Infrastructure
Investment in retail infrastructure such as malls, shops, supermarkets, warehouses, etc. requires significant capital outlay. Investment-linked incentive of upfront deduction of 150 per cent/ 100 per cent capital expenditure is currently available for various sectors such as hospitality, healthcare, etc. However, a similar benefit is not available for the retail sector. The government should extend such incentives towards the retail sector as well, providing a much needed thrust to investment in retail infrastructure.Introduction Of GST And Efficiencies In Indirect Tax Regime
Rental expenses contribute majorly to the operational cost of retailers. These retailers occupying rental premises have to incur service tax on such rents. Given that the retailers are predominantly engaged in the sale and distribution of goods to the ultimate customer, the output liability is generally restricted only to VAT and not service tax. In view of the same, service tax paid on input services including rent is not available as credit, thereby increasing the cost of operations.
In order to mitigate this challenge, appropriate changes may be done in the credit rule so as to specifically provide beneficial relaxation to retailers. Also, rules should provide credit of services availed by the stores to manufacturer/ retailer. Alternatively, abatement may be provided to the service category of 'renting of immovable property', so that there is an effective reduction in the service tax paid on renting, thereby minimising the cascading effects.
The levy of service tax on reimbursements towards electricity charges is also not creditable to the retail sector thereby increasing the burden of cost.
The industry would look forward for specific exemptions that may be provided so that such reimbursements of electricity charges made by the retailers to their landlords/ lessors do not attract service tax.
GST would be a game changer for the retail industry as the issue of non-creditable taxes would be put to rest thereby bringing in tax efficiency. Tax Incentives For Consolidation
There has been substantial increase in M&A activity in the retail and consumer sector. As of May 2015, the total deal value in these sectors stood at $1 billion. However, there are certain tax hurdles for amalgamation of retail companies that the government should address in the upcoming Budget.
Currently, the benefit of carry forward and set off of accumulated loss of an amalgamating company engaged in retail is not available for an amalgamated company. In order to ensure positive growth in the sector, the government should extend such benefit to a retail company merging with another company as well. Extend Benefit For Start-Ups To Retail Sector
The government recently unveiled its flagship initiative 'Start-up India' detailing policy measures to promote and incentivise start-ups in India. While relaxation in FDI norms would encourage the foray of foreign brands in India, it is equally important to provide an environment for Indian start-ups to invest in and create global Indian brands. To start with, the government could consider clarifying the definition of a start-up to include persons investing in developing a retail brand in India. Benefits accorded to start-ups would automatically apply to such domestic investors as well. The proposed three-year tax holiday, fast track patent registration, credit guarantee fund, etc. will provide a level playing field to Indian retailers against MNCs for their sustainable development and an opportunity to foray into the global retail markets.
The present Central government after coming to power has taken several steps for a non adversarial and stable tax regime such as clarifications by way of circulars, accepting favourable tax rulings, increase of thresholds for departmental appeals, etc. The actions of the government have given a boost to the investor sentiments in various sectors including the retail sector. The government, by introducing the aforesaid changes, will further stimulate the retail sector, which shall be in alignment with its goal of improving India's Ease of Doing Business ranking as well.
The author is Tax Partner, EY India. Views expressed are personal