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Retail boom in the indirect tax web
February, 09th 2008

When companies target to contain their distribution costs, they find indirect taxes only adding to the challenge.MR VARANASI SURESH, A GURGAON-BASED EXPERT IN INDIRECT TAXES.



While retailers are concerned about the high cost of real-estate, the recent levy of service tax on renting of immovable property is likely to be an added cost to the companies in the absence of any taxable output service offered by them, says Mr Varanasi Suresh, a Gurgaon-based expert in indirect taxes. It is noteworthy that there is no tax credit set-off available between service tax and VAT (value-added tax), he adds, during an e-mail exchange with Business Line, on the key challenges for retail and the associated indirect tax costs.

The constitutional validity of this particular levy has been challenged by the Retailers Association. But, for now, the service tax charge at the rate 12.36 per cent remains. The inability of companies to pass on the service tax to customers will pressurise retail margins, observes Mr Suresh.

Excerpts from the interview:

What is worrying on the procurement and distribution side?

Lack of proper distribution infrastructure and costs associated with distribution are major areas of concern. The tax costs include service tax and VAT/CST (Central Sales Tax).

Service tax: Procurement and distribution costs incurred by companies get further added up due to the levy of tax on services such as procurement services, goods transportation, clearing and forwarding, outsourced logistics and warehousing.

When companies target to contain their distribution costs, they find indirect taxes only adding to the challenge.

VAT/CST: Though VAT has been implemented across all states (except Uttar Pradesh, which has now agreed to implement VAT), there are still tax costs associated with movement of goods from one State to another. In the case of inter-state purchase/sale of goods, the levy of CST at the rate of 3 per cent continues, which adds to the costs.

Further, for stock transfers of locally procured goods, there is a certain percentage loss of VAT credit (typically 4 per cent) to the business.

Further, the variance in VAT rates, credit provisions, etc, among States also increase the cost of compliance for retailers having operations in various states.

Availability of skilled manpower is another issue

Thats right. Retailing is manpower-intensive. One of the key challenges for retail companies is to identify, recruit and train people. Reaching out to agencies specialising in recruitment, training and supply of manpower for retail sector is a solution. However, from a service tax perspective, this only adds to total costs.

So, how do you suggest that companies cope with these problems?

We may expect the government to take measures in terms of policy decisions and developing distribution infrastructure. Meanwhile, it is important for the companies to plan their operations well in advance and grab the opportunity.

A definite challenge for companies is to keep their overall tax costs as low as possible. The key would be to find the right balance between (a) centralisation vs decentralisation of distribution and warehousing activities; and (b) in-house vs outsourcing activities, and most importantly a well-thought tax-efficient structure for their operations.

On FDI in retail

Currently, there are regulatory restrictions on foreign direct investment (FDI) in the retail sector, which are being intensely debated at various forums.

Under the automatic route, the FDI policy permits investment up to 100 per cent in the case of (a) wholesale cash and carry trading, and (b) trading for exports. This means typically B2B (business-to-business) wholesale cash and carry operations are permissible while B2C (business-to-customer) retail operations are restricted.

Also, under the FIPB (Foreign Investment Promotion Board) route, 100 per cent FDI is allowed for (a) trading of items sourced from small-scale sector; and (b) test marketing of items for which a company has approval for manufacture. Further, up to 51 per cent FDI is allowed in case of single brand product retailing.

Let's not forget that the retail sector, with GDP (gross domestic product) growth of over 8 per cent in the last couple of years, and the consequential increase in retail spending, has suddenly become a centre of attraction. Several global and local players have shown keen interest in retail and want to be part of the action. Retailing in India is estimated to be a $200-billion industry, of which less than 5 per cent is organised. Hence, there is a huge opportunity for companies to explore and create value.

Obviously, the current policy is cautious in opening up retail, even as the industry clearly wants further liberalisation. However, given the current political environment, it is difficult to realistically expect substantial changes in the policy, at least in the short-term.

For the moment, therefore, foreign companies are exploring innovative operational structures for conducting business in India.
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