Union Budget: More Pain, Less Cheerby Udit Jain on May 26, 2007
The budget proposals for 2007-08, presented by Mr. P. Chidambaram, Union Minister of Finance, on the 28th February, 2007, have brought more pain than cheers to Organised Retail- one of the Indian economy’s fastest growing sectors. Organised retail, according to estimates, is growing at a compounded annual rate of about 30 per cent.
Service Tax on Lease Rents: The most painful blow of all is the imposition of 12 per cent Service Tax (+3 per cent Education Cess) on commercial rents. Most of the retail premises, especially the bigger ones, are taken on lease by the retailers. The lease rent is a major cost element in the operational expenses of any retailer. This measure will, thus, prove to be a big dampner, particularly when retail margins are seriously squeezed. All premises, whether used for the front end or for the back end (such as warehousesI will attract this levy.
Cement Cost: Even, the cost of owned premises are going to become more expensive, considering the likely rise in the cost of cement. Presently, government levies, which at Rs. 1200 per MT constitute about 30 per cent of the total price, will increase by Rs. 200 per MT due to revision in the rate of excise duty.
FBT on ESOPS: Imposition of FBT on ESOPS to employees is another negative, particularly when the sector is experiencing severe shortage of talented manpower. Although technically FBT is levied on employers, it will ultimately get reflected in compensation packages, which are currently offered on the ‘cost to company’ basis.
No incentives on developing supply chain infrastructure: In the light of Minister of State for Commerce, Ashwani Kumar’s recent assertion, while no one was expecting granting of the industry status to the sector, one was certainly looking forward to the announcement of incentives on the development of supply chain back bone as well as participation of private players in the utilisation of some of the Railway’s assets that are presently lying idle.
FDI in Retail: There was also expectation of allowing FDI in speciality retail sectors like sports goods, electricals, etc. which do not affect existing small operators. One hopes that this will be included in the FDI policy, once the report on the impact of big retail on the sector, including of transnational retailers, is available from ICRIER, which has been assigned the task.
Incresed Education Ces / DDT: While, imposition of additional 1 percent educational cess would also have an adverse impact, levy of MAT and increase in dividend distribution tax would affect listed companies in the business.
Excise/ Custom Duty Reductions: Among the beneficial measures, in the short run, one could expect marginal advantage accruing from increased demand of certain consumer goods, like, biscuits, footwear, umbrellas, pet food, processed food, ready to eat mixes, apparel made from man made and polyter fibers, gems and jewellery, on which excise or custom duty concessions have been announced.
CST Reduction: Reduction in CST from 4 per cent to 3 per cent could reduce cost of transferring goods inter state albeit to a limited extent as most of the consumer goods manufacturers have their own warehouses in every state where they can transfer goods without incurring CST. In the long run, the shift towards common GST would, however, considerably reduce transaction and logistic costs as the good could then be freely moved without the constraint of state boundaries, etc.
Peak Duty Reduction: Although, details are yet to be fully analysed, reduction in peak custom duties could result in the reduced capital cost of imported equipment, like, scanners, printers, RFID readers and tags, store fittings, store display materials, air conditioning and refrigeration equipment required for establishing cold chain. Reduction in excise duty on plywood will also help reduce store construction costs.
Growth Orientation: As the budget is expected to be conducive for maintaining the growth momentum, in the long run it will benefit the sector as a whole as more disposable income with the consumers would mean more consumption.