Published Editorial

Income Tax Cuts to Help Retail Sector

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Rahul Kakkad

Senior Tax Professional, EY

Budget 2014 was looked upon as the primary opportunity for the new government to provide a boost to the economy while continuing to improve the state of the fiscal deficit. In this regard, there was little doubt that the Finance Ministry had a daunting task before itself to balance both major challenges faced by the economy.

Through the proposals the Finance Minister garnered industry confidence by appreciating challenges before the country, calling for steady growth increase, consistent improvement towards fiscal consolidation and announced the new administration's intention of providing the country with a stable and predictable tax regime. Further the Finance Minister highlighted the importance of manufacturing to the economy as well as towards the improvement in employment numbers. Additionally the budget placed thrust on agriculture, power and infrastructure, which are regarded as key sectors having immediate concerns, to provide impetus to the country.

The Finance Minister further levelled focus on retroactive amendments; assuring industry and foreign players of no further proposals from the new administration to tax transactions retrospectively. Also the budget speech assured stakeholders impacted by these changes that a standing committee would be formulated to settle disputes on the controversial retrospective amendments.

The specific proposals and clarifications which may impact the retail and consumer products sector are as below:

Key policy changes

The Finance Minister through his proposals clarified that manufacturing units would be allowed to sell products through retail including e-commerce platforms without any additional approvals. This is a welcome move, as it brings clarity on the debate for FDI in manufacturing companies, which sell products through e-commerce.

The budget has further proposed to accelerate the setting up of a national market and to work closely with state governments to revamp their respective APMC Acts, to help establish private markets. Further there will be thrust given at the state-level to establish farmers' market and allow farmers to sell their produce directly by eliminating middle-men which would enable farmers to fetch better prices for their produce.

Direct tax proposals

The major fillip given on the direct tax front is the increase in the slab rates for income-tax for individuals. Also the budget proposes more benefits to individuals by increasing the 80C deduction benefit to Rs1,50,000 from the prevailing Rs. 1,00,000, and pushing the deduction allowed on loan taken for purchase of self-occupied house property to Rs. 2,00,000 from the erstwhile deduction of Rs. 1,50,000. The deduction benefits for individuals is certain to increase disposable income in the hands of consumers which is expected to lead to a rise in consumer spend, providing indirect impetus to retail and consumer products sector.

While there were no major direct tax proposals to boast about from a retail and consumer products perspective, there were a few notable proposals from a Transfer Pricing ('TP') standpoint which is assured to bring cheer as will bring a higher level of tax certainty. The Budget proposes to roll-back APA provisions to enable an APA entered into for future years to be applicable during prior period transactions, up to 4 years, preceding the year of applicability of the APA. Further, multiple years' data and range concept has been proposed to be used for the determination of arm's length price. This would definitely be a welcome step to reduce litigation and ambiguity on TP issues.

Benefits under customs and excise through alteration of rates

The indirect tax slice of the budget has proven to be a mixed bag. While on the one hand, consumers would benefit on account of reduced customs and excise duty rates on certain products, there is a marked increase in excise duty on tobacco and similar kind of goods, excise duty has been increased on cigarettes, gutkha and chewing tobacco, pan-masala and aerated products in order to mobilize revenue.

Customs duty has been reduced on products like LCD and LED TV panels (of below 19 inches) and Colour picture tubes, exemption from special additional duty (SAD) on all components used in the manufacture of personal and tablet computers.

Similarly, reduction of excise duty on footwear, on specified food processing and packaging machinery and on RO membrane element used in household water filter could result in some saving. However, in order to encourage domestic production of goods, education cess on secondary and higher education cess (3 per cent) was levied on all imported electronic products making such products costlier.

To summarize, a keenly awaited budget provided the retail and consumer products sector with a very balanced plan. While, the Finance Minister has provided the consumer with a larger amount of disposable income, he has sought to mobilize resources by increasing duties on cigarettes, tobacco, pan masala, gutka, aerated waters, etc. with the intention of taking a step towards a healthier environment. The budget has stressed on greater tax certainty in a specific view to reduce the ever burgeoning amounts locked in tax litigation. Overall, the budget seems to be a welcome move towards tax certainty, fiscal consolidation and a small step towards adopting a stable tax regime over the next 5 years.