Budget Resolves for Franchise Industry
With most of the market signals remaining positive with Union Budget 2010-11, consumer is happy being at the center stage of consumption story and is in a better position than a year ago. However, challenges remain. Read on to know what is in platter for for the SMEs and franchise industry…
Franchise industry has been looking forward several regulatory as well as policy reforms to facilitates its growth. A positive GST outlook by government and rise in threshold for tax compliances has been seen as a very positive move by the franchise industry. However the long impending demand of abolishing dual taxation on the franchise services has been clearly ignored by the policy makers. Presently both service tax as well as VAT are imposed upon the franchise services which distorts the franchise model completely.Morover service tax on rental proceed further makes deters the profitable feasibility. In all it has been the budget has been moderately favorable 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 favorable for us since this might directly affect the quality of production.’.
Badrinath, Director, Accretive Global stated that the budget has both the shades of gray 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 4 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.
· Further, much against the industry expectations, the FM has retained the CST at 2 per cent and the base rate of excise is increased from 8 per cent to 10 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 favorable ecosystem which can be realized by necessary monetary policy reforms.