The Indian retail industry is showing signs of recovery and players are focusing on operational efficiency, growth and collaboration with foreign players. The industry is also seeing a paradigm shift on the direct tax, indirect tax and regulatory fronts that have the potential to define the evolution of the sector.
From an operational perspective, the supply chain and logistic functions define the key mechanics of the retail industry. So, the introduction of GST will have a huge impact on its functioning. The introduction of DTC will also have a ripple effect. The corporate tax rate of 25% proposed in the DTC appears well-calibrated. But proposals relating to the levy of MAT on ?gross assets? at 2%, DTC provisions overriding tax treaties and introduction of Branch Profit Tax of 15% could have a detrimental impact. DTC holds that where liaison offices are involved only in purchasing products exported by Indian suppliers, the same would not create a taxable presence in
India. Renovation expenditure is now considered capital expenditure if there is an extension of business, substantial replacement of equipment or a new asset is bought. Fees paid towards infrastructure have been held as not liable to withholding tax, and free use of trade name and trademark ancillary to service agreements has been held as not taxable.
In Budget 2010, the FM reiterated the need for greater opening up of retail trade. This indicates that there is hope for opening up of the sector, enabling the infusion of FDI. However, though the government is warming up to the idea of opening the gates for FDI in multi-brand retail, the consolidated FDI policy has introduced certain restrictive changes for wholesale cash and carry trading, in which 100% FDI is permitted.
On the single-brand retail trading front, from the second half of 2009, there has been an increasing trend in the numbers of approvals granted to foreign retail players dealing in products ranging from mobile phones and body care to jewellery. Thus, several Indian and foreign companies are collaborating to set up shop in India through the single-brand retail route. The significant impact created by the tax and regulatory regime makes it imperative for Indian as well as foreign retailers to structure retail operations appropriately to ensure a successful foray into the Indian retail space.
The author is associate director, tax & regulatory services, EY