Published Editorial

Budget 2014 Should Ease Service Tax on Rent Payable by Small Retailers

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By

Rahul Kakkad
Senior Tax Professional, EY

Being the first budget of the new NDA government, this is surely a prime set-up for the government to pass across a strong message in its road to delivering the high expectations. The government needs to bring in unorthodox, effective reforms to power the process of reviving a slowing economy.

In the retail sector budget reforms would be eyed with renewed vigour by industry leaders and foreign retail giants, who have been avidly contemplating investments in what is considered to be the largest, most upcoming retail markets in the world. There is no doubt retail sector reforms are considered as one of the more crucial, big ticket reforms, which have the capability to provide the much required impetus for the next phase of economic development. Accordingly, there is not an iota of doubt that the finance minister has the incredibly challenging task in hand to deliver on expectations of all stakeholders.

Listed below are some of the more major, long standing industry expectations and recommendations, which the finance minister may use to positively shake up the face of the retail sector through the current fiscal budget:

Expectations

Recommendations

Unique industry status for the retail sector

Most importantly, providing the retail industry with an independent ministry will enable to address the ever expanding industry-wide issues (including retail policy) and is a much deserved forum for the sector which may help streamline growth in the sector.

Roll out GST provisions and remove indirect tax inefficiencies currently faced by retailers

Rolling out the long-pending GST provisions would be a welcome step in boosting consumption and reducing prices in the country, as transactions will be devoid of cascading effects of tax. It is expected that GST would also remove various indirect tax inefficiencies currently faced by retailers (e.g. non-creditable service tax on commercial rent, CST cost on interstate procurements and the dual taxation (both service tax and VAT) of franchise fee). Pending GST roll-out, an immediate measure that would benefit the retail sector is introduction of service tax exemption for small retailers - say those paying gross rentals up to threshold of Rs.10 lakh - removing them entirely from the ambit of service tax on commercial rent.

Increase in disposable income to consumers through friendlier tax slab

Slabs should be realigned to bring in the effect of increases in cost of living and inflation in order to increase the disposable income in the hands of lower/middle class consumers, thus enabling greater purchasing power.

Investments/ incentives for the betterment of retail infrastructure and promoting capital expenditure

Currently, investment-linked benefit for setting up and operating cold storage facility is available only to specified businesses. To remove ambiguity, it should be clarified that the same is extended to the retail sector as well. Further, it is pivotal to provide the retail sector with investment-linked incentives and accelerated depreciation for promoting investment in back-end infrastructure, warehousing facilities, etc. Furthermore, the government could contemplate to bring in a friendlier set of policies to allow creation of retail and entertainment zones (REZs) - along the lines of the current SEZ regulations - to encourage shopping tourism and consumption.

Employment related incentives

The retail sector is expected to provide a massive boost in employment which would in turn involve significant costs. Accordingly, retail companies should be given stimulus in the form of tax benefits/incentives for generating additional employment.

Curbing ambiguities with issues surrounding transfer pricing

It is imperative that appropriate guidelines/clarifications be issued to provide taxpayers with greater clarity, larger overview for tax planning and curbing prolonged litigation on issues relating to their annual marketing, franchisee fees, advertising and sales promotion spend, royalty payments and tolerance band for computation of arm's length price.

The task at hand for the finance minister is an unenviable one, which would involve balancing industry expectations coupled with retail interests of producers, market intermediaries and the final consumer as well as the interests of the revenue and common taxpayer.

Views are personal.