Retail needs FDI to reach its potential
To reach its potential, retail sector requires significant capital, technology to open it to FDI.
By Gaurav Taneja, |
In 2003, India’s economy was projected to overtake the US to become number two soon after 2060. However, given the revised estimates, the chances are that the ‘overtake’ may actually happen even earlier! With such growth prospects, rising incomes with increased per capita spending, changing consumer tastes and high proportion of young working population — no doubt India tops the list of emerging markets for global retailers!
However, the retail sector is presently grappling with certain policy, regulatory and tax issues, which if not quickly addressed, may impact not only the prospects of retail sector but also the long-term India story to a some extent.
At the regulatory front, presently, FDI is completely prohibited in multi-brand Retail. Further even in case of single-brand retail, only 51% FDI is allowed with prior government approval. However, if organised retail in India has to grow as forecasted/estimated, it requires significant capital, technology and application of latest global best practices. In such case, restricted FDI regime may be an impediment. Growth of organised retail is likely to have a positive impact not only on end consumers, but also on employment generation, supply chain efficiency, agricultural practices, sourcing from India, etc.
Organised retail, besides benefiting the consumers by way of competitive product pricing and quality service, is introducing the Indian consumer to a shopping experience like never before. The modern shopping complexes are becoming the destination point for shoppers as well as ‘window-shoppers’. There is everything for everyone — shopping, entertainment, and food, all of it under one roof. Further, being largely labour-intensive, organised retail is likely to unleash huge job opportunities.
Further, to the surprise of many, retail also requires application of global best practices in terms of processes, systems, quicker assimilation and implementation of new technologies. The food supply chain in India remains fragmented and unorganised. From farm to fridge, distribution of most food items involves multiple intermediaries and wastage during transportation and storage. Organised Retail is expected to result in significant investments in upgrading the technology and practices in the entire value chain, and, the removal of intermediaries. This will reduce wastage and duplication of efforts resulting in farmers realising both higher productivity and better price.
Opening up the sector to global retailers will only result in further investments to help farmers scale up and modernise farm practices. Direct inclusion of farmers into this process on fair terms would give them the first real opportunity they have had in centuries. The extent of sourcing from India will also grow manifold when global retailers are allowed to operate in the Indian market. Global retailers have invested significantly in the local economies they are present in. In the process, they have improved living standards of consumers, suppliers, farmers and employees and generated greater quantity and quality of employment.
All of the above strongly advocate a case for allowing FDI in retail sector. A gradual approach, similar to telecom sector, may also be explored, such as, opening up the sector for 51% FDI now, with a clear road map for further liberalisation. In a scenario where large Indian business houses/conglomerates like Tatas, Reliance, Birlas and Bhartis have already entered the field with huge investment plans, there does not seem to be any logic in arguing against FDI on the ground of impact on mom-and-pop stores.
Besides allowing FDI in retail, to unleash the growth potential of retail sector, government will also have to give infrastructure development its due attention, so that it keeps pace with the current retail transformation. Further legislative reforms, and rationalisation of fiscal laws, is also required to keep the momentum going.
The rising demand for cornering prime locations has hiked the property lease rentals across the country. The recent levy of service tax on such rentals has further aggravated matters. Further, a typical retailer is subjected to service tax levy also on security, storage and warehousing, commission and collection agents’ services, transport services. This becomes a significant additional cost, given the wafer thin margins in this industry. In most cases, the retailers are not able to utilise the credit of service tax paid on the input services consumed by them. Similarly, the credit regime is also not very friendly in respect of central sales tax / entry taxes.
Retail sector needs a much better set of regime, till an integrated goods and service tax (GST) is introduced. Given the huge benefits of organised retail, and the likely spiralling effect of the sector’s growth on the growth of Indian economy, including the rural economy, it is high time that this sector receives its due attention, and measures are introduced liberalising and rationalising regulatory and tax environment.
The author is national tax director and partner Ernst & Young, India
However, the retail sector is presently grappling with certain policy, regulatory and tax issues, which if not quickly addressed, may impact not only the prospects of retail sector but also the long-term India story to a some extent.
At the regulatory front, presently, FDI is completely prohibited in multi-brand Retail. Further even in case of single-brand retail, only 51% FDI is allowed with prior government approval. However, if organised retail in India has to grow as forecasted/estimated, it requires significant capital, technology and application of latest global best practices. In such case, restricted FDI regime may be an impediment. Growth of organised retail is likely to have a positive impact not only on end consumers, but also on employment generation, supply chain efficiency, agricultural practices, sourcing from India, etc.
Organised retail, besides benefiting the consumers by way of competitive product pricing and quality service, is introducing the Indian consumer to a shopping experience like never before. The modern shopping complexes are becoming the destination point for shoppers as well as ‘window-shoppers’. There is everything for everyone — shopping, entertainment, and food, all of it under one roof. Further, being largely labour-intensive, organised retail is likely to unleash huge job opportunities.
Further, to the surprise of many, retail also requires application of global best practices in terms of processes, systems, quicker assimilation and implementation of new technologies. The food supply chain in India remains fragmented and unorganised. From farm to fridge, distribution of most food items involves multiple intermediaries and wastage during transportation and storage. Organised Retail is expected to result in significant investments in upgrading the technology and practices in the entire value chain, and, the removal of intermediaries. This will reduce wastage and duplication of efforts resulting in farmers realising both higher productivity and better price.
Opening up the sector to global retailers will only result in further investments to help farmers scale up and modernise farm practices. Direct inclusion of farmers into this process on fair terms would give them the first real opportunity they have had in centuries. The extent of sourcing from India will also grow manifold when global retailers are allowed to operate in the Indian market. Global retailers have invested significantly in the local economies they are present in. In the process, they have improved living standards of consumers, suppliers, farmers and employees and generated greater quantity and quality of employment.
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All of the above strongly advocate a case for allowing FDI in retail sector. A gradual approach, similar to telecom sector, may also be explored, such as, opening up the sector for 51% FDI now, with a clear road map for further liberalisation. In a scenario where large Indian business houses/conglomerates like Tatas, Reliance, Birlas and Bhartis have already entered the field with huge investment plans, there does not seem to be any logic in arguing against FDI on the ground of impact on mom-and-pop stores.
Besides allowing FDI in retail, to unleash the growth potential of retail sector, government will also have to give infrastructure development its due attention, so that it keeps pace with the current retail transformation. Further legislative reforms, and rationalisation of fiscal laws, is also required to keep the momentum going.
The rising demand for cornering prime locations has hiked the property lease rentals across the country. The recent levy of service tax on such rentals has further aggravated matters. Further, a typical retailer is subjected to service tax levy also on security, storage and warehousing, commission and collection agents’ services, transport services. This becomes a significant additional cost, given the wafer thin margins in this industry. In most cases, the retailers are not able to utilise the credit of service tax paid on the input services consumed by them. Similarly, the credit regime is also not very friendly in respect of central sales tax / entry taxes.
Retail sector needs a much better set of regime, till an integrated goods and service tax (GST) is introduced. Given the huge benefits of organised retail, and the likely spiralling effect of the sector’s growth on the growth of Indian economy, including the rural economy, it is high time that this sector receives its due attention, and measures are introduced liberalising and rationalising regulatory and tax environment.
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The author is national tax director and partner Ernst & Young, India
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