Cabinet approves FDI liberalisation for single-brand retail trading; a sweet spot for the industry

Updated: January 23, 2018 4:31:45 AM

Cabinet approves FDI liberalisation for single-brand retail trading; industry now looks forward to Budget 2018 to fill in the blanks

FDI, FDI liberalisation, Indian joint ventures,  India, Union Budget 2018, FDI in companies, 100% FDI, GDP growth, retail industry, IP rights, retail industry in India Accordingly, for the first five years of operation in India, multinationals will now be permitted to set off incremental sourcing of goods from India towards global operations against the required local sourcing from India.

Aashish Kasad

The single-brand retail trading sector witnessed much-awaited relief with the government opening up the sector to 100% FDI under the automatic route, and also relaxing the mandatory local sourcing norms to make them more business friendly. So, 100% FDI under the automatic route is expected to provide global retail brands increased flexibility, while determining the quantum of their equity stake in Indian joint-ventures where brand rights and proprietary IP rights are granted, without requiring any prior FDI approval. This will certainly provide an increased comfort to brands that are looking to co-venture with Indian players to benefit from their local knowledge and capabilities in supply chain and distribution, pricing and consumer insights. In addition, the automatic route enhances the entry and ease of doing business in India, by doing away with the voluminous paperwork associated under the approval route and the time taken to obtain the approval. Further, with the global retail industry expressing concern in implementing the mandatory local sourcing norms applicable where FDI exceeds 51%, the Cabinet has also announced liberalisation to ease the initial challenges faced with respect to the same.

Accordingly, for the first five years of operation in India, multinationals will now be permitted to set off incremental sourcing of goods from India towards global operations against the required local sourcing from India. This liberalisation would allow global retailers adequate time to design and implement a local sourcing strategy for the Indian market, while at the same time encouraging them to consider India as a sourcing hub for their global operations. As one may recall, in 2016, in the case of companies trading products with ‘state of the art’ or ‘cutting edge’ technology, local sourcing norms were exempted for the first three years of operations. Given the above, while single-brand retail trading companies can now breathe a sigh of relief, the multi-brand and food retail segments are eagerly awaiting the Union Budget 2018, with their hopes pinned on further FDI liberalisation.

For instance, FDI in companies engaged in multi-brand retail trading is currently restricted to 51%, while at the same time mandating a minimum investment of $100 million as well as 30% local sourcing towards Indian operations. This industry would appreciate a similar relaxation in the local sourcing norms as was announced for single-brand retail trading and the investment ceiling being increased to greater than 51% equity stake in an Indian entity, under approval route, providing commercial flexibility. While 100% FDI has been permitted since 2016 for retail trading of food products manufactured or processed within India, global companies have been hesitant to invest in India on account of not being permitted to sell any non-food products locally. Permitting such companies to sell non-food products to a certain extent of their turnover could make the investment policy more attractive to several global supermarkets and hypermarkets, who can evaluate setting-up operations in the country, thus providing consumers with improved accessibility to global brands and leading technology and international best practices, while also improving the food processing yield in India.

Coming to the domestic retail industry, more specifically the “mom and pop” retailers operating in the country, there has been some anxiety created on account of the recent FDI liberalisation announcement. With several global companies now expected to enter the Indian marketplace, the smaller scale domestic retail industry hopes that the Budget 2018 will provide some relief for them as well. Until March 31, 2010, retail traders having turnover up to Rs 4 million were provided the option of adopting presumptive taxation at the rate of 5% (under section 44AF). Reintroducing similar provisions, with an increased turnover threshold, could help the “mom and pop” retailers across the country enter the tax net and be more compliant, while reducing the complexity associated with tax compliance and the scope of burdensome tax litigation, thus improving the ease of doing business for them as well.

Finally, while all the above factors would be crucial to give a positive thrust to the supply side of the retail industry, consumption trends are also extremely important to support the GDP growth. As per the first advance estimates for 2017-18 released by the Central Statistics Office, growth in private final consumption expenditure has declined to 6.3% in the current fiscal (from 8.7% in 2016-17). Accordingly, with growth experiencing a slowdown, the Budget 2018 is also expected to include some favourable announcements for consumers, enabling them have more disposable income in their hands, leading to higher consumption, such as an increase in the basic exemption limit and a change in the tax slabs for individuals.
Should the upcoming Budget 2018 meet the expectations of global retailers, domestic retailers and Indian consumers, the retail industry in India could reach a sweet spot with both demand and supply factors having an extremely favourable outlook for the coming years, thereby contributing more meaningfully towards the country’s GDP growth.

Author is Partner & India region tax leader, Consumer Products & Retail, EY India

(Vidur Kanodia, senior consultant at EY, provided inputs for this article)

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition