Research Mar, 04 2010

Post budget reactions

With most of the market signals remaining positive with the Union Budget 2010-11, the consumer is happy being center-stage of the consumption story and is in a better position than last year. However, challenges remain. Read on to know what is in store fo

By Malvika Lal
Senior Research Analyst
Post budget reactions

The franchise industry has been looking forward to several regulatory as well as policy reforms to facilitate its growth. A positive GST (Goods and Services Tax) outlook by the Government and a rise in the threshold for tax compliances has been seen as a very positive move by the franchise industry. However, the long impending demand for abolishing dual taxation on the franchise services has been clearly ignored by the policy makers. Presently, both service tax as well as VAT is imposed upon the franchise services which distorts the franchise model completely. Moreover, service tax on rental proceeds further deters the profit feasibility. In all, it has been a budget that has been moderately favourable for the franchise industry. Gaurav Marya, President, Franchise India Holding Ltd shares, “The budget 2010-11 brings a reasonable assortment for small retailers as well as franchisors. While increased income tax exemption limits will certainly boost consumption; imposing service tax on rental property distorts retail business models by making the accessibility of retail spaces precipitously expensive, hence making it unviable to sustain profitably.”

According to D P S Kohli, Chariman, Koutons Retail India Ltd, “Overall, it has been a mixed budget for us. New tax slabs and rates have been introduced which would offer 60 per cent relief to the tax payers providing them with greater disposable income. This would provide the necessary boost to consumer’s spending a pre-requisite to unleash the true growth momentum of the retail sector. In addition, reduction of surcharge on domestic companies that the finance minister has announced is sure to accelerate the expansion plans for the retail players at home. However, industry status continues to delude the retail sector. This is a disappointment since this is the first step towards reforming the sector and organising the highly unorganised sector. The hike in the excise duty is also not favourable for us since this might directly affect the quality of production.

Badrinath, Director, Accretive Global stated that the budget has both the shades of grey and white for the franchise industry he further explains detail implications

The good news

  • No change in service tax rates and the same continues at 10.3 per cent. The FM in his budget speech states that this proposal is ‘to maintain the growth momentum and also to bring about a convergence in the rates of tax on goods and services.’
  • Small businesses stand benefited on account of lower direct tax compliance costs. The threshold for having the accounts audited for tax has been increased from 40 lacs to 60 lacs. Further, small businesses with turnover/receipts lower than 60 lacs can also choose to be covered by the presumptive tax system. The threshold earlier was only 40 lacs.
  • The frequency of remittance of central excise is extended to quarterly basis from the current scheme of monthly payments for units operating under the SSI Scheme.
  • As a welcome step, exemption from four per cent special additional duty of customs is granted to mobile phones, watches and garments imported in pre-packed condition for retail sale.

The not-so good news

  • The FM has retrospectively amended the provisions relating to levy of service tax on renting of immovable property. The judgment of the Delhi High Court in the case of Home Solutions Retail is negated by making mere renting of immovable property liable to service tax.
  • Furthermore, much against the industry expectations, the FM has retained the CST at two per cent and the base rate of excise is increased from eight per cent to ten per cent.
  • The FM has extended service-tax on health check-up services provided to employees of a business-entity or persons covered under health-insurance-schemes if such payment is made by the business entity or insurance company. This is likely to increase the cost of healthcare services. However, if carefully managed, the franchisees in this sector could claim credits of service tax paid on various input services such as renting of immovable property and franchisee fee which is currently adding to the cost of the operations. This could reduce the net price impact for the end consumer.

As the franchise industry brings with its surge innovative business models to tap the potential of Indian consumption, it also demands a favourable ecosystem which can be realised by necessary monetary policy reforms.

Related: A spark for spanking new franchise concepts

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