Budget 2022: Success of critical government initiatives for industry tied to consumer market

The coronavirus pandemic has impacted several business sectors in India significantly over the last two years, especially the consumer market sector. The Government of India (GOI) seems to be focusing more on the manufacturing sector, Make in India scheme and MSME sector. It may be prudent to consider that the success of these critical initiatives is tied to those of the consumer market sector, especially retail and e-commerce segments, that would eventually market the products manufactured in India. Accordingly, the GOI is requested to consider giving some booster shots to the consumer market sector in the upcoming Union Budget 2022.

Lower corporate tax rate for trading, e-commerce players in consumer market sector

The GOI reduced the corporate tax rate for new manufacturing Indian companies to 15 percent provided they start manufacturing operations on or before 31 March 2023. Along with the need to extend this sunset date, this lower corporate tax rate should be extended to trading and e-commerce players as well since they supplement the manufacturing activities and employment objectives of the GOI significantly.

Higher depreciation on Furniture & Fixture (F&F), etc.

To attract customers, the retail outlets in malls, etc. spend a lot of money on F&F for the ambience of stores, display area, etc., and they are also required to revamp it from time to time. The current tax depreciation rate of 10 percent on F&F is not commensurate with the underlying useful life of these assets which are critical to sustain and grow the business. The GOI should consider increasing the tax depreciation rate to a minimum of 30 percent on F&F and similar assets for retail stores, display areas, etc.

Increase in carry forward period of tax business losses

The GOI should consider increasing the carry forward period of tax business losses incurred in the last two financial pandemic-affected years as most consumer-facing businesses require a lead time to return to normal operations. In case the current period of eight years continues, then these businesses may not be able to claim set-off of these business losses.

Similarly, the period of eight years for carrying forward of business losses lapsing in the last two financials is requested to be extended suitably. Another relief that GOI could consider is the benefit of tax losses eligible to be carried over in merger of Indian companies that is currently available only to cases of industrial undertakings. The GOI should extend this benefit to merger schemes in the consumer market sector as well, subject to suitable conditions.

Rationalisation of certain tax measures for non-residents

The provisions of the Equalization Levy (‘EL’) on non-residents are very wide in their scope and encompass a wide spectrum of transactions done online. The introduction of Significant Economic Presence for non-residents has added to their complexities and uncertainty while transacting with Indian parties/customers. It is the industry’s expectation that the wide ambit of these provisions is curtailed, and a few qualifiers and clarifications are introduced to these provisions. This would also align well with the legislation and changes scheduled to be rolled out under the OECD BEPS initiatives and the recently concluded OECD/G20 Inclusive Framework on BEPS agreed even by India and which should warrant potential rollback of EL eventually.

Simplifying TDS, TCS compliances

The introduction of Tax Deducted at Source (TDS) and Tax Collection at Source (TCS) obligation on purchase and sale of goods on certain taxpayers and the TDS obligation on e-commerce operators’ have significantly increased compliance and financial burden on them and more so during the coronavirus pandemic.

It is expected that these provisions be rolled back and converted into reporting frameworks on the lines of Annual Information Return, or they are simplified and relaxed significantly.

Fiscal incentives for additional employment generation and capex

The GOI may consider relaxing the employment threshold period to 150 days in the tax incentives for generating additional employment to the consumer market sector as currently available to certain manufacturing sector categories (Section 80JJA). The GOI may also consider introducing capex-related tax incentives to taxpayers making investments in back-end and supply chain infrastructure in Tier II & III cities to augment their business footprint and also for spurring such economic activities across India.

Relaxation in foreign investment norms

The GOI may consider relaxing sourcing norms for Indian companies with foreign direct investment beyond 51 percent and undertaking single-brand retail trading, given that their business and supply chain has been disrupted for almost two years now. The existing window of five years for complying with these source norms should be extended to a minimum of 10 years to enable these companies and their Group to develop the required vendor base in India which is aligned to their local as well global supply chain requirements.

Conclusion

With the changing business economics, the sustenance and growth of the consumer sector are equally crucial for driving economic growth and achieving the GOIs vision of a $5 trillion-dollar economy. The sector expects fair and commensurate treatment from the government in the upcoming budget proposal.

Shabbir Motorwala and Puneet Gupta are Partners and CAs at BSR & Co LLP. The views expressed in the article by the authors are personal.

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