India most attractive retail destination in the world (2024)

India has been rated as the most attractive retail destination in the world by AT Kearney for the third year in a row. Indian retail is witnessing a convergence of several favourable factors such as a steady economic growth, favourable demographics, infrastructure creation and supply of good real estate etc. The low penetration of retail in India and the above factors cumulatively create a base for a sharp growth in organized retail.

Given the above potential, any favourable change in the external environment would provide stimulus to the Retail industry. It will be difficult to deny the fact that Budget 2008 is a populist budget rather than an economy booster. However, many experts predict that it will have a positive impact on the Consumption patterns. The growing trend of consumers to allocate larger share of income to consumption and gradual improvement of lifestyle provides bountiful opportunity to the retailers and will provide the necessary stimulus to organized retail.

Today, every international retail player is either already in India or wants to foray in the Indian market. However, the current Foreign Direct Investment ("FDI") regulations do not permit FDI in multi brand retail trade. Currently, FDI is allowed only to the extent of 51% in single brand retail trading with prior approval and 100% in wholesale trading. Though there was a strong demand from industry for opening up the FDI doors for multi brand retail trade, but given the fact that elections are around the corner, the industry was not very hopeful on the liberalization at this end. Given such a scenario, it seems that the retail formats will materialize in India only in the form of joint-ventures and franchises for the time being as most of the international players have India on their drawing boards.

Another major demand from retail industry was the abolition of service tax on renting of immovable property as the retailers were not able to claim a credit of such service tax. However, the issue remains untouched by the Finance Minister. Infact, to add to retailer's woes, the Finance Minister has covered the temporary use of commercial space (without any transfer of possession) under the service tax net. With the spiraling real estate cost, the economics of conducting retail and of providing best prices to customers would definitely get compromised here.

Though Budget 2008 does not have substantial direct benefits for retail sector, general reduction in excise duty rate from 16% to 14% and increase in maximum exemption limit of tax for individuals is certainly a welcome move which in long run would increase the consumption levels and consequently, the profitability of the retailers. Further, extension of section 35D which allows deduction for expenses incurred for the purpose of expansion, to service sector would make expansion a more lucrative option for the retailers.

Reduction in excise duty from 12% to 8% on certain varieties of writing, printing and packaging papers will lead to direct benefits to retail industry. Proposal to reduce central sales tax from 3% to 2% is a good breather for retail industry, which gives an indication that we will slowly move to the GST regime.

Supply Chain is the backbone of retail industry. Budget 2008 has in its bag certain amendments for supply chain segment:

"Exemption from excise duty in relation to refrigeration equipment (consisting of compressor, condenser unit, evaporator, etc) on end use basis is an encouragement to cold chain facilities."

"Simplified documentation scheme for the retailers to avail 75% credit for the service tax charged by the transporter."

"For people engaged in 'cargo handing services' scope of service tax has been expanded to include packing with transportation with or without other services such as loading, unloading, unpacking."

Budget 2008 seems to be agriculture friendly budget where on one hand the Finance Minister has waived the loan of poor farmers and on the other hand expanded the definition of agriculture income under the income tax act to include cultivation of saplings/ seedlings in a nursery. Accordingly, even if the nursery is maintained independently, without resorting to basic operations on land, it will be exempt from tax, hence paving the way for more organized retail in this area.

To summarise, Budget 2008 has not provided any special incentives to retailers and they have been left asking. However, the positive side of this is that that there are no non-desired surprises for the retailers and their consumers have been provided with more booty in their hands thus promising better sales for the organized retail. In the near future, Retailers would expect more from the government in terms of liberalization of FDI in retail, industry status and other direct and indirect tax benefits as retail has the potential to improve India's infrastructure, boost employment and trigger other growth aspects. So for now, Happy Budget and hoping for the best stimulus for Retail!!

(The author is a senior tax professional with Ernst & Young)

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