The recent amendments to the foreign direct investment regulations in the retail sector have been lauded by corporate India. Not only is the policy change initiative from the government regarded as path breaking, it also helped in driving away some of the negative sentiment surrounding our economy.
While on an immediate basis, many foreign retailers have started to knock on the government's door for approval, one would have to patiently wait for the long-term benefits to flow in for all stakeholders. The role of the respective state governments in making this policy initiative a real success is something which many commentators will keenly track.
Retail as an industry does not really have a long Budget wishlist from the Finance Minister compared to some of its cousins in the infra or banking space, as typically many of retail's expectations are related to general policy decisions.
Nevertheless, some key initiatives which the Finance Minister may look into to spur growth are:
1) Many existing retailers are bleeding under losses and consolidation could be a possible way forward for the industry. The current income tax laws do not allow carry-forward of benefits to entities not qualifying as an "industrial undertaking" under the provisions of Section 72A of the Income Tax Act, 1961. It will be good to have some more flexibility in this provision to enable mergers and acquisitions in the retail sector.
2) A clear road map for goods and services tax (GST) will certainly remove the indirect tax inefficiencies in our current system. Prices of retail goods going down to spur consumer demand will always work wonders around the price-sensitive Indian market.
3) While certain direct tax benefits related to warehousing/ supply chain management were indeed provided in the past budgets, it will help if the Finance Minister cuts the duties and taxes related to the goods/machinery used in backend support infrastructure such as hand-held scanners, warehousing software and cold chain machineries
4) Rationalizing subsidies to control the fiscal deficit and the consequential price inflation will not only have a positive impact on manufacturers, by controlling the input costs, but also make pricing of goods more competitive.
5) Real estate cost is ever so high in the larger Indian cities; consequentially, rental costs form a major part of the operating costs for retailers. It will be a move worth considering for the Finance Minister to eliminate service tax on renting or at least charge abated rates.
(Arjun Khandelwal, senior tax professional, Ernst & Young. The views expressed here are personal.)
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