Budget 2024 Expectations: Consumer industry

Anand Ramanathan, Partner and Consumer, Products and Retail sector Leader

Current environment

The Indian consumer industry is expected to grow rapidly and become the world’s third-largest by 2027, behind the US and China. India, one of the largest retail markets in the world, is expected to grow to US$1.41 trillion by 2026.

Driven by affordable data plans and access to e-commerce, the country is set to add over 900 million new internet users by 2025, significantly altering the purchasing patterns of Indian consumers. Consumer protection is becoming increasingly vital for the government and industries. The growing young population and a burgeoning middle class, concentrated in urban hubs, are the key forces driving this growth. The middle class is the main driver of consumer demand and expenditure. The business landscape is changing, and “experience” has emerged as an important factor influencing consumer preferences. While India’s consumer industry has grown exponentially due to the country’s growing young population and relatively progressive purchasing power, there is still disparity in consumption between urban and rural areas in the country.

The government’s focus has been to simplify the tax structure and rationalise provisions. Moreover, there is a need to provide certainty and visibility to taxpayers by clarifying ambiguous provisions and offering incentives to boost investments. The introduction of alternative dispute resolution mechanisms, such as Safe Harbour and APA, have strengthened trust between the government and foreign businesses investing in India.

Expectations

Ask #1: Promote investment and control inflation

(i) Support retail growth by taking steps to control inflation and increase consumption

India’s retail inflation, measured by the Consumer Price Index (CPI), stood at 4.83 percent in April 2024 . Inflation data on the Wholesale Price Index (WPI) (calculates the overall prices of goods before selling at retail prices) reached a 13-month high of 1.26 percent during the period. The CPI peaked in April 2022 at 7.79 percent, while the WPI peaked in May 2022 at 15.88 percent. Some schemes, such as the Pradhan Mantri MUDRA Yojana, may become more prominent as a good avenue for providing financial support to small-scale kirana and brick-and-mortar stores.

After the pandemic, challenges emerged in the form of high inflation. This caused commodity prices to soar to multi-decade highs in many countries, prompting central banks to increase interest rates and restrict economic activity. High inflationary conditions affected consumer behaviour, making people more frugal with their spending. Consequently, this led to a slowdown in the consumer goods industry.

An improvement in India’s consumer inflation index will be a directly visible measure. Consumer inflation has been trying to correct itself for the past three quarters. However, it has become difficult to contain the rising prices of even basic food items in India due to the challenging international landscape that is pushing fuel prices to record highs and the strained geopolitical conditions in the Middle East, Ukraine and Russia.

(ii) Foster more avenues for global investments in retail, including food retail

By 2025, India’s grocery and food retail segment is expected to reach US$850 billion. Given the sector’s immense potential, the government should revamp FDI policies to make them more attractive to investors and remove regulatory barriers that have hindered foreign investment in the country.

The government currently allows 100 percent FDI in food retail trading, including e-commerce, for food products manufactured and produced in India, subject to the government’s approval. Expansion to other products manufactured in India would make the sector even more appealing to foreign investors, leading to more investments across the value chain.

To promote seamless growth and harmonious coexistence of traditional and modern retail, the government should consider allowing 100 percent FDI in multi-brand retail trade, at least for goods manufactured in India. Implementing a cohesive national policy is essential in this regard.

(iii) Increased investment in the Open Network for Digital Commerce (ONDC) and digital network creation

The digitisation wave is yet to be seen on the digital commerce front. The launch of ONDC seeks to address that part of the economy. The government will continue to invest in digital public infrastructure to drive digitisation in the Indian economy. By 2030, India’s digital consumption could jump fivefold to US$340 billion, with 500 million people making digital transactions. With 8–10 percent digital penetration across B2B companies, the network could be large. It could emerge as a more inclusive network with the potential to connect 80–90 million self-employed workers with demand and integrate six-to-seven times more MSMEs into a buzzing, diverse ecosystem.

In India, B2B sellers lag the global average digital penetration of 20 percent. Of the 165–190 million consumers who already use digital commerce, 10–15 million are power users who typically live in urban areas and shop across sectors.

Only 6 percent of MSMEs actively sell on e-commerce platforms. To boost digital commerce, the government must create an ecosystem that eliminates or resolves challenges for stakeholders. Therefore, a continued and significant investment in ONDC and digital infrastructure building is required to open new growth avenues in the Indian economy.

Ask #2: Strengthening rural consumption

Due to a high rural unemployment rate and slow growth pace, expectations from the government to push rural demand include increasing Minimum Support Prices (MSP) for agricultural produce, making sustained investments in rural infrastructure projects, ensuring efficient implementation of Direct Benefit Transfer (DBT) schemes and promoting robust crop-sowing practices.

The government’s focus on capital expenditure and private-sector manufacturing and service activity should support income generation and boost economic activities. The focus should be on the local implementation of government policies. This is set to create a conducive environment for good crop production to match demand, keep prices in check and strengthen rural demand.

The government could continue focusing on rural housing schemes or allocate a good amount towards improving rural infrastructure to drive consumption.

Ask#3: Employment framework

(i) Define a regulatory framework for the last-mile delivery workforce
Industries such as e-commerce, food tech, logistics and retail are set to increase the recruitment of temporary staff, mainly in delivery, logistics, warehousing, sorting and packing positions. However, gig workers face issues such as income instability, unpredictable hours and absence of crucial benefits such as health insurance, retirement plans and paid leave.

The number of gig workers has witnessed continuous increase in metro and tier-1 markets wherever e-commerce and hyper-local deliveries have grown. The government should acknowledge the gig workforce as formal workforce under labour laws.

With over a million people expected to join the gig workforce in the next decade, there is an urgent need to regulate the gig workforce in India. Failure to establish a regulatory framework for gig workers will adversely affect the burgeoning digital economy and its workforce. The government should initiate tripartite consultations to comprehend the intricacies of the gig economy and craft a balanced legal framework that harmonises business growth with the welfare of gig workers.

(ii) Increase the scope of employment generation incentives

• The threshold limit of emoluments for employees should be increased to INR50,000 to expand the ambit of Section 80JJAA.
• The 30 percent deduction may be increased to 50 percent to incentivise the industry to generate more employment avenues.
• The period for claiming deductions may be increased from 3 years to 5 years. This will allow newly incorporated companies to avail the benefits of this provision. Additionally, companies may incur losses during their initial years of operations and, hence, may not be able to claim such a deduction.

Ask#4: Tax and regulatory framework

(i) Ensure stability by fostering a fluid regulatory environment

In the retail sector, where retailers operate at various scales, the ability to adapt to changes in regulations varies significantly. To ensure the timely exchange of critical information and regulatory directives, it is imperative to establish a flexible and informative mechanism. For instance, in FY 2023 alone, more than 5,000 regulatory updates were issued through the union, state and local government websites, typically in the form of notifications, gazettes and circulars. These updates often lead to modifications in forms, deadlines, frequencies, penalties and other aspects. Most of these alterations come into effect almost immediately, demanding swift interpretation and implementation. Hence, it is essential to consider a compliance system that takes into account the scale and risk profile of each retailer in the sector.

(ii) Clarify the perquisite valuation rules for electric vehicles

• The Indian government encourages the manufacture and use of electric vehicles to promote sustainability. Many companies provide car facilities to their employees through leasing. The perquisite value of these benefits is determined per Rule 3 of the Income Tax Rule, 1962. According to the rules, valuation is based on the cubic capacity of the engine.
• Electric cars have a motor instead of an engine, and battery capacity is measured in Kilowatts (kW) instead of cubic capacity. In the absence of specific clarification, companies extend only petrol/diesel cars to their employees.

(iii) Resolution of undue hardship on e-commerce operators for TCS compliance on facilitation of the sale of air tickets

• Every e-commerce operator must collect an amount calculated at a rate not exceeding 1 percent of the net value of taxable supplies made through the operator by other suppliers, where the consideration with respect to such supplies is to be collected by the operator.
• As an industry practice, in case of the sale of airline tickets, an e-commerce operator deposits TCS on its own and later recovers that from the airline. This blocks funds for an e-commerce operator for a considerable time. Thus, compliance with TCS provisions vis-à-vis airlines is causing great economic hardship to online travel agents who are committed to ensuring full compliance with GST laws.
• The TCS provisions sought to avoid tax evasion by suppliers listed on the ECO platform. As the aviation industry is the most organised sector and is regulated by IATA, the TCS provisions should be amended to exclude taxable supplies by an airline.

(iv) Time to make the compensation cess “compensatory” for consumers

• While implementing the GST law in 2017, the government decided to compensate states for the loss of revenue by imposing a levy known as “compensation cess”. While it was meant for the first five years since the introduction of GST, it has been extended until 2026.
• Coupled with the burden in terms of longevity, the rise in rates of levy for MUVs and luxury sedans has made the segment unaffordable for most consumers. Higher rates will not only directly affect consumers but will also have indirect consequences in terms of increased pricing for taxis, a higher logistics burden, etc. To address the limited volume growth of the industry, the government may reconsider high rates.
• Additionally, restructuring the import duty scenario for the said segment and EVs may bring relief to the industry and promote green mobility. Reducing import rates for EVs should be the government’s top priority, as it will boost the automotive sector and support the logistics and transportation sectors.

(v) Relief in the form of clarifications and relaxations: Placement of equipment at customer location for utility

• Several companies place their equipment at the customers’ location, with the pre-requisite that such customers regularly procure a minimum quantity of consumables.
• There is a deliberation among stakeholders on whether this minimum purchase obligation serves as a consideration for the placement of equipment and whether it should be taxed as a lease of equipment. A clarification should be issued in this regard to shed light on the taxability of such transactions.

(vi) Support the consumer durable sector

• For the market to thrive, PLI schemes should be expanded to encompass smart TVs, refrigerators and washing machines. Additionally, given the increasing role of television in education and information dissemination, a reduction in GST on large LED TVs should be considered.

(vii) Services by foreign pilots in India - secondment or not?

• In India, airlines sometimes receive the services of foreign pilots stationed by foreign entities, whether related or unrelated. In line with the Supreme Court’s decision in NOS, every such arrangement is currently being seen through the lens of a mandatory secondment arrangement to be further made eligible for tax.
• However, in cases similar to those of foreign commercial pilots who are being employed by airlines in India after obtaining relevant DGCA clearances, specific clarification is still required on the parameters for such an arrangement to be taxable.

(viii) Clarify the ambit of taxation on benefits and perquisites

• The terms “benefit and perquisite” under Section 194R may be defined to provide certainty regarding taxable transactions. Moreover, separate rules for valuation may be provided (similar to the valuation of perquisites provided by an employer to an employee).
• It may be clarified that in the case of multi-level distribution channels, withholding tax provisions are required to be applied only at one level (say, by the manufacturer). This will avoid double taxation on the same amount.
• It may also be specified that withholding is required to be done in the hands of the actual recipient only and not in the case of pass-through arrangements. For instance, manufacturers may provide benefits or perquisites to retailers through distributors. At present, manufacturers withhold taxes under Section 194R while providing the benefit to the distributor, who also withholds taxes while passing onward to the retailer (intended recipient).
• It may also be clarified that brand-building items, such as billboards, standees and stationery with company logo/name placed at prominent places in dealer premises, are not tantamount to any benefit. These are advertisement expenses incurred by the taxpayer, and appropriate withholding may be done while purchasing the said materials.

(ix) Rationalise withholding tax provisions applicable to ecommerce operators

• In cases where multiple ecommerce operators are involved in a transaction, withholding tax under Section 194-O may be applied only on incremental amounts vis-à-vis different components/legs of the supply chain (distributors, retailers, etc.), instead of the gross amount, to avoid cascading effects.
• Furthermore, the mechanism contemplated in Section 194-O does not consider two platforms. In situations where clicking on specific tabs of one vendor directs customers to another vendor, it may be clarified that the website of the first vendor is not facilitating the transaction for the second vendor by merely hosting the option to avail goods/services from another vendor.
• The threshold may be increased to INR40 lakh (at least for individuals and HUFs) to align with the threshold for GST registration prevalent in most states.
• It may also be clarified that TDS should be applied on the amount more than the minimum threshold, similar to Section 194Q.
• It may be clarified that sales returns, cancellations and charges incidental to the sale of goods or services shall be excluded while computing the “gross amount.” TDS may be applied on the net amount of sales, similar to GST. This will align TDS and GST provisions.
• Exemption may be provided in case the sale of goods or services is facilitated to a non-resident customer, similar to Section 206C(1H) relating to TCS on the sale of goods.
• It may be clarified that the provisions are not applicable on non-resident e-commerce operators.

(x) Tax deduction at source on the purchase of goods under Section 194Q and TCS on the sale of goods

• At present, the provisions of Section 206C(1H) require the seller to collect TCS at 0.1 percent from a buyer on the sale of goods, subject to certain conditions. Furthermore, the provisions of Section 194Q require the buyer to deduct TDS on the purchase of goods at 0.1 percent before making payment to the seller, subject to certain conditions. Therefore, the same transaction is subject to both TDS and TCS.
• While the primary liability is on the buyer to deduct TDS, in case the buyer does not deduct TDS, the seller is required to collect TCS under Section 206C(1H) and pay interest in case of a delay in deduction and deposit of TCS under Section 206C(1H).
• This causes undue hardship to the seller in case of failure by the buyer, as non-deduction of tax will be noticed by the seller only upon receipt of the consideration from the buyer. It also leads to revised TCS returns from previous quarters and accounting challenges.
• Hence TDS should be applicable on the purchase of goods. It should be the buyer’s responsibility to deduct TDS. The consequences of non-deduction should fall on the buyer. In such cases, the provisions of Section 206C(1H) should not apply on the seller.

(xi) Extend the cut-off date for starting manufacturing operations

• To boost India’s viability as the next manufacturing hub, especially with the China+1 strategy to bolster investment in the country, the government should consider extending the concessional tax regime. This will help boost investor confidence and will also supplement the PLI schemes being run by the government. Currently, the sunset date under the said regime of Section 115BAB is 31 March 2024.