India’s retail market is estimated to reach $1.5 trillion by 2030, from $0.793 trillion in 2020, driven by socio-demographic and economic factors such as urbanization, income growth, and a rise in nuclear families. On the other hand, the Indian e-commerce industry is expected to cross the $350 billion mark by 2030, growing at a CAGR of 23 percent.

The growth driver of the sector in India has been the measures taken by the government on technology and digitization, especially around innovations, new modes of digital payments/online wallets, and the development of local logistics support.

Accelerate the National Retail Trade Policy

- One of the keys asks of the retail industry has been to accelerate the implementation of the National Retail Trade Policy to streamline the growth of all formats of retail trade, reduce compliance and regulatory burden, give industry status to the sector, along with financial incentives to large scale projects. The Government could consider bringing in reforms for the long term problems by committing to complete digitization (one of the five pillars of the proposed National Retail Trade Policy) where new businesses do not have to wait for months to obtain various licenses (broadly over 25 depending on the state/municipality) and permissions under various laws specific to retail trade in India such as the Shops and Establishments Act, Competition Act, Consumer Protection Act, Essential Commodities Act, and the Legal Metrology Act, etc.

Relax compliance requirements - To promote ease of doing business, the Government could consider doing away with a number of compliance requirements, such as Tax Collected at Source (TCS) (data collation being one of the primary reasons for the introduction of this provision) on sale of goods considering the Government has introduced TDS on purchase of goods @0.1 percent /5 percent in the Union Budget 2020. Also, sufficient data points would be available on the purchase/sale side of the transaction as well from GST compliances.

The Government could also consider waiving off Transfer Pricing (TP) compliance requirements for foreign companies receiving royalties, interest, and service fees that are subject to withholding tax and having exemption from filing tax returns. Further, dividend being distribution/ appropriation of profits, exclusion of dividend (whether paid or received by an Indian company) from the rigors of TP compliance can be considered. Similarly, Advance Pricing Agreements (‘APAs’) which allow taxpayers and tax authorities to determine in advance, an appropriate transfer pricing methodology for a given set of transactions over a fixed period, should be accepted for customs purposes as well avoid multiple scrutinizes on the same transaction.

Strengthen the start-up community – The retail and e-commerce sector comprise a large start-up community. To promote and nurture this community, the Government has undertaken a flagship initiative called ‘Startup India’, which empowers start-up ventures to boost entrepreneurship, economic growth, and employment across India. In further support of the cause, the Government could consider providing the benefit of deferment of withholding tax in ESOPs from exercise to sale or specified events for specified start-ups and to all DPIIT registered start-ups. Furthermore, it is expected that Budget 2022 could consider addressing the disparity in long-term capital gains tax rates between Non-Resident and Resident shareholders of start-ups. Additionally, a tax and regulatory framework for overseas listing of shares can also be expected to be announced.

To promote growth and investments, the Government may take steps such as allowing the benefit of carrying forward and set off of “accumulated loss and unabsorbed depreciation” to “service sector” like retail/trading, consider reducing the tax rate on dividends for residents in order to bring parity with non-residents.

Rationalization of equalization levy - One of the most debated issues has been the impact of the equalization levy, introduced in the Union Budget 2020. A simple interpretation of the scope of equalization levy would mean that it would apply to transactions facilitated online, with its wide ambit, its impact includes those supplies for which the orders are placed through emails or on the ERP.

It is an industry expectation that a few qualifiers would be introduced to this levy, limiting its extent. Also, it would be important to clarify the fate of the equalization levy, on account of the impending introduction of the BEPS Pillar 1 approach, in 2023.

Taxes rates - Regarding corporate tax rates, considering the past couple of years’ budgets and announcements, they are likely to be unchanged. Nonetheless, the benefit of a reduced tax rate of 15 percent, which is only for new manufacturing companies, be extended by 2-3 years given the COVID 19 pandemic which may have halted the plans of many companies. The benefit of the reduced tax rate in some form and shape may also be extended to the service sector to drive growth.

While amendments in GST will not form part of Budget 2022 since GST amendments are done through the GST Council process, the key wish list of the retail sector with respect to GST inter alia includes an input tax credit for civil construction, allow issuances of a credit note for discount, refund of unutilized input tax credit in case of closure of the store, clarification on input tax credit on point-of-sale materials, etc. From a customs duty rate standpoint, the duty rates may also remain the same. However, one can expect some movement in duty rates to incentivize value addition in India and correct inverted duty structure.

Incentive manufacturing - Lastly, the Production Linked Incentive scheme should be expanded to include other retail sectors as well apart from the ones already included to enhance India’s manufacturing capabilities, promote retailers to expand their units, generate employment and improve exports.

The retail and e-commerce industry have set their eyes on Budget 2022 and hopes that the Government will address the situation at hand and comes up with the relaxation and fiscal package which could further boost growth in the sector.

by- Paresh Parekh, Partner and Tax Leader - Consumer Products and Retail, EY India

Nitesh Malpani, a senior tax professional with EY India has also contributed to this story.

(The views expressed in this article are the authors’ personal views.)

First Published:Jan 23, 2022 12:46 PM IST