Budget 09 fails to meet retail sector expectations: EY

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The announcements made in Union Budget 2009 have offered a smile to all tax payers be it individual or corporate. But, has the budget done enough to provide the long overdue boost to the retail sector? True, the budget could not have fulfilled all the demands of retail sector. However, there are some pressing issues which the honorable Finance Minster could have addressed to brings in some zeal in already lull retail arena.

Importance of foreign capital to meet the growing needs of the economy has been emphasised by the Finance Minister in his budget speech. Even the Economic Survey for 2009-10, recommended introduction of Foreign Direct Investment (FDI) in multi brand retail by making a start with food retailing. However, no policy announcement on FDI in multi-brand retail has been made by the Finance Minister. Interpretation of Press Note 2, 3 and 4 in relation to allowability of FDI in multi brand retail through downstream investments has again been left open to interpretation.

Long standing demand of retail players to accord industry status has also been left untouched. It gives a feeling that unless retail gets an industry status, it might not be able to garner for itself specific tax concessions or reliefs.

There are no direct policy announcements for retail in the budget; however, the other measures announced in the budget would certainly have an indirect positive impact on retail sector too. Here are some of the proposals put forward by the FM, which would have an impact on retail sector too.

Increasing the threshold limit and removal of surcharge for individual tax payers will give surplus money in the hands of consumers thereby boosting consumption. 

Retailers have been grappling with the issue of higher cost and low margins.  Abolishing Fringe Benefit Tax (FBT) will go a long way in improving the cash flows of retail players and also provide them the necessary flexibility to design promotion schemes without worrying about the increase on such schemes. 

Simplification of tax regime for small business houses having turnover not exceeding INR 40 lakhs will reduce the burden of maintaining detailed accounts.  However, abolition of presumptive taxation for retail trade of 5% will be a bit of dampener.

Introduction of section 35AD for deduction in respect of capital expenditure on setting up and operating a cold chain facility or warehousing facility will help in modernisation of traditional supply chain management. Setting up of cold chain facilities will help in reduction of wastages, which will in turn bring pricing efficiency for the retailers.  However, the scheme more or less provides for accelerated depreciation which can be set off only against profits of same/ similar business. This may not necessarily be an incentive to the business in this sector as it is only a timing difference. A profit based incentive would have been a more welcome move as it provides for a tangible benefit.

Like all good things do not come for free, the FM has increased the MAT profit percentage from 10 to 15%, which will adversely affect those retailers who are paying taxes under MAT.

Abolition of commodity transaction tax (CTT) is a positive move as it avoids unnecessary tax burden on genuine hedging transactions.

Increase in outlay for infrastructure is likely to boost flow of money and demand into the economy. 

On the indirect tax front, the FM has not rolled back the earlier tax cuts and a reaffirmation by the FM to introduce GST by April 1, 2010 is reassuring

The announcements on reduction in customs duties on LCD panels and reduction of excise duty on branded jewellery to quote a few will reduce the cost of the products which will hopefully be passed on to the consumers and help in boosting the demand of these products.

Overall, given the fiscal situation and the budgetary constraints, the Government deserves to be complemented on the budget.

Amarpal Chadha is a senior tax professional with Ernst & Young, India.