Published Editorial

Budget 2013's impact on the retail sector

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Economic Times


Paresh Parekh

Tax Partner

While, Budget 2013 does not seem to propose any big bang reforms like 'granting of industry status to Retail sector', GST introduction, etc, retail sector is likely to get impacted by the proposed changes as follows:

Product costs:

The industry was abuzz with talks about an impending increase in basic excise duty and service tax rates from 12% to 14%, which in turn, would fuel inflation. With the peak rates of service tax, customs and excise duties remaining unchanged, consumers can feel relieved that the Budget 2013 would not lead to an immediate across-the-board increase in prices of goods and services.

Relief has been given to readymade garment manufacturers and cereal producers with the option of excise duty exemption being restored for branded readymade garments and basic customs duty on de-hulled oat grains being reduced from 30% to 15%.

On the other hand, Excise duty on mobiles having RSP >=Rs 2,000 has increased from 1% to 6% and excise duty on cigarettes and other similar tobacco products has increased by approximately 18%.

Impact on luxury market:

This year's budget seems to be focused on achieving better socio-economic parity with a higher tax burden being cast on the society segments with high disposable income.

Finance Mister has proposed a 'rich tax' by way of a surcharge of 10% on tax on INR 10 Million plus income earners. Further, duties on various luxury consumer products have been increased. For instance, - the basic customs duty on high-end cars has been increased from 75% to 100%. Similarly, central excise duty on SUVs has been increased from 27% to 30%, except those used as taxis.

Boost to Rural Consumption:

There is a substantially increased allocation for Rural Development Ministry [46% over last year - around Rs 25000 crore more]. Further there is allocation of around Rs 10,000 crores earmarked towards National Food Security. Also, farm credit increase of around 125000 crores has been proposed. These measures should overall help rural consumption story. Retailers may increase their rural focus.

Foreign investment:

Capital starved Retail companies may find interesting to wait for further clarification on how the new definition of 'FII' and 'FDI' will work, since otherwise stringent conditions associated with FDI may not apply to FII. Finance Misiter has proposed to follow the international practice and lay down a broad principle that, where an investor has a stake of 10 percent or less in a company, it will be treated as FII and, where an investor has a stake of more than 10 percent, it will be treated as FDI.

Franchise arrangements:

Withholding tax on royalties / franchise fees is proposed to be increased substantially from 10% to 25% subject to treaty benefits. Hence, foreign franchisors may end up having a higher tax burden in India.

GST still remains a dream

A key announcement that the retail sector was looking forward to was a detailed roadmap for GST implementation, since GST is expected to significantly reduce the indirect tax burden on the sector by removing cascading of taxes. However, the Budget 2013 does not include any significant announcements in this regard. The FM reiterated the challenges being faced by the Government and appealed to State Governments to extend their cooperation in formulation of overall consensus to allow tabling of the draft Bills on Constitutional amendment and GST legislation before the Parliament.

(Views expressed here are personal)