Union Budget 2021: Offline retail hard hit by pandemic; seeks relief in taxation, rationalisation of licensing process

A consumer durables store. Image courtesy Metc123/Wikimedia Commons

Year 2020 has witnessed huge uncertainties and challenges for nations across the globe including India. Economic activities were severely affected for a few months as India imposed several lockdowns to deal with the outburst of the pandemic.

Brick and Mortar Retail, which is India’s third-largest sector, has been one of the worst-hit sectors owing to the ongoing pandemic with companies having undergone complete shutdown of their outlets, low consumer footfalls, etc. On the contrary, e-commerce channels have witnessed steady growth as they are a widely used source by consumers even during the pandemic.

Instantaneous relaxations which government can consider through Budget 2021 orbit around providing additional tax deductions to companies for overheads like store outlet costs, employee salaries, rent, electricity expenses, etc. during the pandemic-wedged period. In order to boost purchasing power in the hands of consumers, the government should also consider reducing tax rates, aligning income tax slabs, increasing basic exemption limits for income tax, increase overall budgetary spending, etc.

Some of the long-term reforms which the government could focus on would be providing reforms which result in ease of doing business. The government should consider rationalisation of the licencing process for new entrants and expansion in retail business by complete digitisation whereby significant time can be reduced to obtain licenses for new entrants in the retail sector.

Further, some of the industries such as the toy industries are now rightfully subject to stringent quality checks with regards to imports. While it is a good practice to have these quality measures in place, the government should provide relevant infrastructure facilities to these companies to reduce the overall costs of the products. Also, it should consider providing incentives such as accelerated depreciation/additional depreciation for boosting retail infrastructure especially in Tier II and Tier III cities of India.

Further, the government may also consider liberalising multi-brand Foreign Direct Investment (FDI) norms around less sensitive and high employment generating sectors like electronics, consumer durables, etc. thereby providing more access to capital and expertise to Indian entrepreneurs and startups.

There are some GST reforms also desired. At present, the input tax credit of GST paid on civil construction costs is not available. The government could consider allowing the input tax credit for retail sector companies who regularly keep adding new stores by closing some of the existing ones and renovate existing stores intended to be used for the furtherance of business or commerce.

Companies also run various schemes for their distributors to promote their brand which act as incentives to achieve their targets by providing samples, marketing materials, brand reminders, point of sale materials etc. Recently authorities have issued an advance ruling which has denied input tax credit on such expenses on the ground that there is no output GST paid on those products. Since these are essential expenses that are incurred for the furtherance of business, the government may consider clarifying allowance of the input tax credit on such business promotion expenses as well.

Moreover, due to the ongoing pandemic, companies are also struggling on manpower as well as facing financial hardship and therefore the government may consider deferring e-invoicing system till 1 April, 2021, for instance.
In order to promote the vision of One Country, One Tax, One Market approach and in light of the fact that the retail sector is batting for an amendment of law under GST to permit cross-state returns for the retailer, the government may consider allowing companies to return goods at any place of its business in the country and not only
in the state in which it has sold the products to.

The current GST rules do not specify the procedure of goods sold in one state to be accepted as a return in another state.

All eyes are now on how Budget 2021 will address the expectations and challenges faced by the Indian retail sector. Timely and appropriate support to retail, which is one of the largest employment generating sectors, will help
improve employment situation especially amongst the needy and relatively less educated class, and also accelerate the capital and income flow to a real productive economy like manufacturing, etc.

The writer is Partner & National Tax Leader, Retail Sector, EY; Utkarsh Mehta, senior tax professional with EY also contributed to the article.