Regulatory policy

High time to accelerate and implement national retail policy to streamline growth

Union Budget 2022-23: Retail sector is a major contributor to India’s GDP

The pandemic, which has been going on for almost two years now, has been extremely trying and difficult for economies around the world, India being no different. The lockdown and restrictions imposed for brief periods, imposing limitations on retail hours, movement of people, working days, etc., have all resulted in heavy losses for owners of retail establishments . As businesses slowly recovered to pre-pandemic levels, the new variant and spike in cases again slowed things down across all business segments.

The retail sector is one of the largest contributors to India’s GDP, 8-10% on average, and the country’s second largest employer. On the other hand, e-commerce channels are growing at a blistering pace with over 19,000 e-commerce businesses in India and over 800 D2C brands worth around $44.6 billion in 2021 expected to reach $100 billion by 2025. Additionally, the D2C startup space has raised $2.04 billion in funding since 2014 with categories like fashion, home decor, and consumer electronics leading the way.

This sector is worth billions of dollars and employs millions of people who need to be given a much-needed boost to head towards recovery. It is hoped that the government will allocate resources to plan recovery, promote growth and stimulate the economy.

In view of the above, the following changes can be expected from the government:

Policy-related measures

Digitization in the Retail Industry to Streamline Business and Compliance Under One Umbrella Law – Currently, new businesses spend considerable time efforts to obtain up to 16-25 licenses for start-up operations.

Accelerate and implement National Retail Policy to streamline growth of all retail formats, reduce compliance and regulatory burden.

Grant industry status to retail as well as financial incentives for large-scale projects, also opening the door to cheaper financing options for the sector.

Increase purchasing power and additional support related to COVID

Consider increasing the standard deduction granted to salaried employees from Rs 50,000 to Rs 75,000 to increase consumption expenditure.

Consider providing tax exemption for amounts received from employers for medical treatment of COVID-19 and assistance to MSMEs and other sectors severely affected by the pandemic.

Increased support for startups

Deferral of taxation of ESOPs from the ‘exercise date’ to the ‘transfer date’ for startups registered with the Department for the Promotion of Industry and Internal Trade (DPIIT).

Resolve the disparity in long-term capital gains tax rates between resident and non-resident shareholders of start-ups.

Announce the tax and regulatory framework for the overseas listing of shares for startups.

Relax the qualification criteria as an eligible startup (turnover limit of Rs 100 crore, certificate of eligible business from the Inter-Ministerial Certification Board, etc.).

Review Angel Tax Exemption Criteria – current criteria needs to be reviewed since only a handful of startups are covered within the thin criteria provided (recognized by DPIIT, total share capital and share premium does not not exceed Rs 25 crore).

Rationalization of tax laws and compliance

The government could heed the industry’s long-standing request to allow deferral and offsetting of “accumulated losses and unabsorbed depreciation to the service sector”, which is currently only available to principally engaged entities. in the making.

Reduce compliance requirements and promote the ease of doing business, by removing withholding tax (“TCS”) provisions on the sale of goods (data collection being one of the main reasons for the introduction of this provision) given that the government introduced the TDS on the purchase of goods at 0.1%/5% later on, also given that enough data points would be available on the purchase side / the sale of the transaction as well as GST compliances.

The advantageous tax rate of 15% granted by the government in 2019 to new units that start manufacturing by 2023 should also be extended to new units in the service sector in order to incentivize the said sector.

Clarify the fate of the Equalization Levy (EL), due to the impending introduction of the BEPS Pillar 1 approach, in 2023 – Additionally, recent clarifications to the EL provisions further increase the possibility of among others include supplies whose orders are placed by e-mail or on the ERP, which may not be the intention of the legislator. It is an industry expectation that a few qualifiers would be introduced to this levy, limiting its scope.

Consider waiving TP compliance requirements for foreign corporations that receive royalties, interest and service charges subject to withholding tax and being exempt from filing tax returns to ease the burden of conformity.

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 specified period should also be accepted at customs purposes in order to avoid multiple checks on the same transaction.

Also, from the perspective of tariff rates, some variation in tariff rates can be expected to incentivize value addition in India and correct the inverted tariff structure.

While the GST changes are not part of the 2022 budget which is channeled through the GST Council, key industry demands include allowing an input tax credit for civil construction, refund of unused GST input tax credit in the event of store closures, among others.

Encourage manufacturing

The production-related incentives program should be expanded to include other retail sectors in addition to those already included to improve India’s manufacturing capabilities; encourage retailers to expand their units, create jobs and improve exports.

The author is Director, Tax and Regulatory Services, EY LLP; Raghavendra Vinayakvitthal, senior tax specialist at EY also contributed to this article.

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