Home Retail There is hardly much directional focus in the budget – R Subramaniam...

    There is hardly much directional focus in the budget – R Subramaniam MD Subhiksha

    By  
    SHARE

    R Subramaniam
    Managing director,

    “Compared to 5-7 years ago, expectations from the budget are low these days as most of the macro agenda is already done. Since expectations themselves are low, the scope for much disappointment is not there.

    However, the latest budget is more a case of minute tinkering, which is not what one would have expected – there is hardly much directional focus in the budget.

    Service tax on rentals is the big problem area for all retailers – at a time when the industry is growing rapidly and there is pressure on rental costs already. Suffering an additional burden is a huge blow.

    Opening up FDI in retail through the front door would have helped greatly – also, given the focus on inclusive growth, any tax/fiscal incentives to retailers on employing non-qualified people and on providing vocational training would have been helpful.”

    Pradeep Hirani
    Managing director, Kimaya Fashion Private Limited

    “PC Chidambaram has not done very much about the budget – he has really missed out on a great opportunity. He could have used the momentum of growth India is currently in the midst of, and propelled it to greater heights. He has decided to play safe, and has just tweaked and realigned the numbers, and presented a simple revision of last year’s budget. He has not taken any major decisions on many urgent fronts.

    The budget will not affect the retail industry much – in the sense that retail in India will not benefit at all from this budget. In fact, considering the soaring heights retail is at right now, it may only harm the industry. For example, the inappropriate levying of 12.5 per cent service tax on rentals for commercial properties will cause the cost of real estate to spiral. The retail industry will pass this burden on to the consumer, who will have to bear the brunt – and considering that buying is at an all-time high, this is not good news!

    The luxury and retail sector will hope that the finance minister will make some amends at least next year. This year, there is nothing to look forward to.

    Considering the take-off position India is in currently on the fiscal sector level, I expected Mr Chidambaram to adopt a more dynamic approach that would have been a steroid/strong booster to the growth rate. For the first time in the history of this country, we are seeing such a high pace of growth. He should have leveraged this to really boost the economy, especially the infrastructure – without which growth potential is not completely realized. For example, he has not reduced customs duties to match international levels, nor has he allowed 100 per cent FDI in retail. Similarly, he should have reduced VAT and brought income-tax levels down by at least 5 per cent.

    Similarly, with the food sector growing all over the world, India must take advantage of our agricultural roots and the fact that we are primarily a food economy. We must make sufficient efforts to invest in this area, since tomorrow processed/stored foods will all become the next big thing. The minister should have given a tax holiday to the processed food products, which would in turn benefit the farmers and have a cascading effect on the economy, thus helping in diminishing the poverty line.

    Our budget should have focused on airport and railroad projects in the eastern region of India – for example, West Bengal, Orissa and even Madhya Pradesh. These are such neglected areas, but truly have so much population and potential that is often overlooked. Our budget should focus on making towns and cities, other than Mumbai and Delhi, stronger.”

    PK Bhandari
    Group president,

    “Extension of the TUF scheme until the end of the 11th Plan period, along with reduction in customs duty on PTA, polyester fibre and polyester yarn, are positive developments for the textile industry. Increased allocation to textile integrated parks will boost the setting up of additional capacities to cater to the growing domestic market.

    Increased spending on industrial training institutes (ITIs) and vocational services will lead to availability of skilled manpower for the manufacturing sector.

    Overall, the fiscal deficit at 3.7 per cent of the GDP and a target of 3.3 per cent for 2007-08 has been the real strategy to counter inflation, apart from the cuts in excise and customs duties. The government’s thrust on agriculture and farm credit is to correct the supply side of the economy, currently seen as one of the causes of inflation. Increased spending on health and education is also welcome. However, some of the provisions like increase in the dividend distribution tax to 15 per cent, increase in education cess by one per cent, and fringe benefit tax (FBT) on employee stock option plans (ESOPs) were unwarranted. Given the current state of our economy with buoyant revenues, increased tax collections, and booming stock market, the finance minister could have taken steps toward some bolder structural reforms.

    The extension of service tax to cover rental of commercial properties will increase the cost of operations for the retail sector, the lease rent being a major cost element in the operational expenses of any retailer. The industry at this nascent stage stands to be hampered by such measures.

    The long-standing demand for 100 per cent FDI in retail sector, not to mention granting of industry status, remain unanswered in this budget. However, the budget is expected to maintain the growth momentum, which in the long run shall benefit the sector as a whole as more disposable income with consumers would mean more consumption.”

    Inder Dev S Musafir
    Director,

    “With regards to the retail industry, the introduction of service tax on commercial rental at this stage only means that brakes have been applied on an industry that is at a critical stage of its evolution. The worst hit from this would be the mid-size domestic companies, which were already burdened by high rentals vis-à-vis their realizable sale values.

    Service tax as a definition should only be imposed if a specific service is being provided, whereas rentals are earnings on fixed assets for the landlord, wherein the landlord does not contribute through providing any service to the business venture.

    In relation to the footwear industry, union budget 2007 has done nothing but further widen the gap between the organized and unorganized sectors.

    By reducing the excise duty on parts of footwear from 16 per cent down to 8 per cent, it has made the inputs cheaper for the unorganized sector, as the organized sector was already able to get the MODVAT on the inputs. Therefore, nothing has changed for the organized sector.

    The unorganized sector was not paying excise duty on finished products; they had to, however, pay excise duty on the raw materials/parts of footwear, which now has been further reduced by the finance minister – which, in turn, means that the unorganized sector is now buying raw material cheaper, and still continues not to pay the excise duty on finished products.

    Instead, if the finance minister would have reduced the excise duty on finished products, it would have encouraged the unorganized sector to come on board, and voluntarily pay the taxes.”

    Sunil Bharti Mittal
    Chairman and Group Managing Director,

    “Overall, it is a growth-oriented budget with focus on agriculture and rural development. This should be seen by the industry as a positive step, since the development of the rural sector will only benefit the industry in the long run in the form of increased demand and services.

    More importantly, the budget sends a clear signal that Corporate India, which has learned to stand on its feet, should not just look at the budget for growth. Focus on education and skill development, healthcare and continued thrust on infrastructure development are very welcome steps. On the telecom front, we are glad that the finance minister has at least acknowledged, if not granted, a long-standing demand of the industry to replace multiple levies with a single levy.”

    Vinod Sawhny
    Head, Bharti Retail Private Limited

    “There are two specific measures that have a direct impact on the retail industry. The levy of service tax on rent of immovable property for commercial use is going to inflate the cost structure for the retail sector, and hence has an adverse effect. On the other hand, the reduction in customs duty by 2.5 per cent on all non-farm equipment is going to benefit retailers who will be importing a lot of in-store equipment and cold-chain equipment.”

    Andreas Gellner
    Managing director, adidas India

    “Overall, politically it seems like a sound budget with the right tones for the current environment. From a corporate point of view, one would have wished for a bolder budget with significant impetus for reform and growth.

    We have seen a significant challenge in retail profitability building up over the last 18 months. With the introduction of service tax on retail rentals, this will pose a significant burden on the value chain. Retailers and brand owners will take the hit and you will see the prices increasing to absorb this significant additional expense. The reduction of import duties has also not been as aggressive as one would have liked to really make an impact and help to curb inflation significantly.

    Incentivize retail rather than putting additional burden on a potential sunshine industry. Organized retail can be a substantial contributor to low inflation. Economists attribute the low inflation rates seen in the United States over the last decade to the competitive retail landscape and the “ effect”. Instead, retailers in India will be significantly set back by the service tax inclusion.

    Also, it is disappointing that the agenda of FDI in retail has not been touched at all!”

    Ramesh Rath
    Director & CEO
    Elite Brands Pvt. Ltd (franchisee of GIORDANO Travel Gear and RONCATO)

    “In my opinion, Union Budget 2007 is not at all industry-friendly, though it provides some sops for SMEs and small service providers. In terms of direction, it does not intend to facilitate/boost growth and rather taxes the growing sectors/companies for their schemes of reaching out to people on the fringes. Clearly, it lacks the bite and aggressive push expected by the industry in pushing economic reforms/growth. Even for the large middle-class population of the country, it does not hold much promise. There is no radical idea to enlarge the taxpayer base and, consequently, the salaried class continues to be the whipping boy with no sops and increased cess.

    For the retail sector, it is very discouraging to note the continuation of the old mindset against FDI in multi-brand retail (irrespective of size). Credit will become that much more difficult to avail and venture capital funds will think twice before investing. ESOPs will be more expensive to offer and, hence, cost of manpower may further go up. The absence of the feel-good factor may slow down consumption, too. Service tax on rentals will add fuel to the fire of spiralling real estate rates – occupation cost will become almost unaffordable.

    For the luggage sector, it will prevent evolution/consolidation of multi-brand format making it more difficult for the premium brands. Rentals are already high and will become still more expensive, forcing retailers to struggle more to break even. Reduction of peak customs duty will help to some extent in controlling costs. However, inflation and lack of incentives will keep local manufacturing less attractive and compel brands to continue sourcing from China.

    Foreign direct investment in retail should have been allowed at least to the extent of 51 per cent. Also, FDI below a particular limit/value should have been allowed in retail without any restriction. In reality, the size of investment matters irrespective of whether it is single-brand or multi-brand. The large FDIs need to be monitored as they will impact the traders adversely, much like the large domestic investments do.

    Efforts should have been taken to facilitate modernization/renovation of the existing stores/shops/markets/malls, etc., to improve India’s attractiveness as a shopping destination.”

    Amit Jatia
    MD & Joint Venture Partner, McDonald’s India (West & South)

    “The budget for 2007-08 has not been very beneficial as it did not announce any significant or major benefits all-round for the retail food-and-beverage industry.

    Our industry is growing at a rapid pace and there are several components that contribute to its growth, from raw produce and distribution to infrastructure and logistics. The growth is also being driven by customers with growing disposable incomes and changing lifestyles.

    On the upside, the intention to provide benefits to the agriculture sector will definitely help the backend of the food chain. Also, the tax concessions provided to the retail sector will continue, which is good and important if we are to see more growth.

    Import duty has been brought down and this will help. The central sales tax (CST) phase-out from 4 per cent to 3 per cent is a good indication and will help the economy all-round.

    On the downside, the service taxes of 12.25 per cent on immovable property will definitely have a sluggish effect on the expansion of the retail sector. Today, everyone aspires to get a good-quality meal at best prices at conveniently located restaurants. In retail, property plays an important cost component and directly influences the potential for expansion.”

    Harish Bijoor
    Brand expert and CEO, Harish Bijoor Consults Inc.

    “In many ways, none of the budget pronouncements have really touched the manufacturing and services sectors of the economy negatively at all. A progressive growth rate of 11-13 per cent across the XIth Plan period is indeed a possibility for these sectors of the economy.

    The real worry lies in the agricultural sector. The focus of the Chidambaram budget on this sector is completely positive and most certainly in the right direction. The farm sector needs it all for sure. And this sector will lap it all up.

    The biggest hit this budget has delivered the retail industry is the 12.5-per-cent service tax slab on commercial rentals. This hits the retail industry right where it matters – below the belt.

    This additional burden is certainly not going to be retained by the retailers at large. It is going to be passed on to consumers completely. So, expect your coffee at a cafe to cost more, just as that haircut at your favourite branded barber will cost more. Watch out for the price of everything that you pick up from retail!”

    Harsh Chopra
    Managing director, RayBan Sun Optics India Ltd

    “This year’s budget is a reaffirmation of the economic reforms started earlier and a continuation of the fiscal policy as it should be. Annual budgets need to be drafted within the framework of long-term policies, and stakeholders should stop expecting any dramatic mid-course policy changes or populist relief. The drop in import duties to near ASEAN levels is welcome.”

    Rajeev Karwal
    Former CEO, India

    “I think it’s the political compulsions that have driven this year’s budget. In some aspects it does not seem to be a Chidambaram budget. The micro detailing like differential excise on cement bags is retrograde. Let supply and competition bring down the inflation, rather than government taxation. It looks like the impending state elections are a consideration in the budget, this year.

    There is nothing for the retail industry which will impact it immediately, except for some negative impact on the rentals. On the food retailing side, however, the direction on agriculture is going to have a positive impact on organized retailing in the coming years.

    I think that the government should have recognized retail as an industry. It should have extended the existing retail FDI policy on single-brand retail to electronic and consumer durables retail, as it is only going to improve the lot of the consumers, manufacturers and people employed in this sector.”

    (The author is the former president and CEO of Consumer Durables vertical of . He is credited with some of the biggest successes in the consumer durables space. He successfully led and turned around brands like LG, Onida, and Electrolux. He can be reached on www.rajeevkarwal.com or rajeev.karwal@gmail.com)

    Jayant Kochar
    Consultant, Go Fish Retail Solutions

    “The budget was largely neutral – no major negatives, while the positives in terms of education/food infrastructure will depend largely on implementation. If effective implementation is achieved, this could be seen (with hindsight, after a few years) as a path-breaking budget.

    As far as retail is concerned, with the industry being driven as it is by real estate, the imposition of service tax on commercial rent will be a huge burden for many retailers who are not in a position to avail of tax credit. However, this will eventually not affect most people too much, since at the rate at which new services are being brought under the service tax net, very soon everyone will be charging and paying service tax, and writing off one against the other!

    The worst things that the government has done for the retail industry is to not officially bring it into existence – that is, give retail the status of an industry. That would help to bring into focus all the many reforms that are required – not just related to finance, but at many different levels of central, state and municipal policy. Given the rapid expansion and huge investments in retail, these are, of course, inevitable. The problem is, that inevitability is getting seriously delayed.”