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7/29/2019 Winning in India's Retail Sector
1/60
Winning inIndias retailsectorFactors for success
www.pwc.com/india
7/29/2019 Winning in India's Retail Sector
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7/29/2019 Winning in India's Retail Sector
3/60Winning in Indias retail sector
ForewordWe are delighted to launch our new thought leadership report, Winning in Indias retail
sector: Factors for success. PwC research indicates that although the Indian retail sector isworth US$ 350 billion, it has a low organised retail penetration of 8%. Modern trade is growing
between 15 and 20% per annum. India is becoming an exciting and dynamic retail destination
due to the following:
Alargemarketsize Loworganisedretailpenetration
StrongGDPgrowth Increasingpersonalincomes Largenumberofaspirationalconsumers(middle-class,youngIndians,ruralpopulation,etc.)
TheIndianretailmarketisevolvingrapidlyandweobservethefollowingfeatures: Previously,shoppingwasviewedasafunctionalactivity.Itmeantbuyingonlytheessentials.
Infact,unnecessaryshoppingorself-indulgencewasfrownedupon.However,liberalisationinthe90s,increasingincomesandforeigntrips,exposuretotheinternet,growingcondenceinonespersonalsuccess,etc.aremakingitacceptabletonotonlybuynon-essentialproductsbualso to splurge on luxury goods.
Indiasretailsectorisdevelopingquicklyandbecomingmorecompetitive.Retailersunderstand the importance of meeting consumer demands.
Supplychainmasterywillbeadriverofcompetitiveadvantage.Astheretailsectorbecomesmore crowded, the use of supply chain and logistics will enable retailers to become agile and
cost-competitive.
In this report, we present the following:
Anin-depthlookatthemaindrivers,trendsandissuesinIndiasretailsector Anoverviewofthekeytaxandregulatoryissues Adiscussiononthebenetsofmoderntrade ThreefactorsforsucceedingintheIndianmarket
Wealsopresentthreekeyexamplesofretailersinvaluefashion,fashionjewelleryandonlineretail,whohavebeenabletoachievedoubledigitgrowth.
WehopethatthisreportwillprovideyouwithadetailedviewoftheIndianretailsector.
Bharti Gupta RamolaExecutiveDirectorandLeaderMarketsandIndustries
Rohit BhasinPartnerandLeaderRetailandConsumerPractice
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ContentsExecutivesummary 6
1.India:Economicgrowthanddemographicdividends 10
2.Regulatoryframework 22
3.Thebenetsofmoderntrade 32
4. Critical success factors 38
Lookingahead 52
Case example 1
E-commerce
Flipkart: Pioneering Indias online commerce market
Customer service will be a critical success factor for online retailers.
Case example 3
Fashion jewellery
Swarovski: Providing Indian consumers with stylish jewellery
Offering the best value proposition is key to long-term success.
Case example 2
Value fashion
Max Retail: Offering value fashion at keen prices
Succeeding at value fashion is a combination of
Fashion andpricing
The customerexperience
Freshness Long-termbusiness model
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Strong GDP growth
Business and consumercondence
Capital markets buoyancy
Executive summary
India is one of the mostdesirable retail destinationsin the world.
Indias twin growth engines of economic
growthanddemographicprolesetitapart
from other nations and present a compelling
businesscaseforglobalretailerslookingto
enterthemarket.
#1 Indiahasalargeandaspirational
middle-classof75millionhouseholdsor300millionindividuals.Middle-classconsumers want products which are
value-driven.
Indiaalsohas500millionIndiansunder the age of 25. Young Indians
aredrivingpurchasesinmobilephones, fashion, accessories, food and
beverages,quickservicerestaurants,etc.YoungIndianshaveaccesstomoremoney than before and with this hascome independence, aspirations and a
demand for products.
Accordingtothe2010WorldWealthReportbyCapgeminiandMerrillLynchWealth Management, the rise in the
totalnumberofmillionaires(orIndianswithinvestibleassets,excludingmainresidence and consumer durables, of
morethanUS$1million)grewalmost
51%,thesecondfastestintheAsia-Pacicregion.
The700millionIndiansresidinginrural India are an opportunity that
retailandconsumer(R&C)companiescannotignore.Penetrationlevelsforseveralproducts,suchaspersonalcare,haircare,skincare,consumerdurablesand electronics are low in rural India.
Retailandconsumercompanieswholocalisetheirproductsforthismarket,withregardtopricepoints,packaging,stock-keepingunits(SKU)size,promotion, will succeed.
Since2005-06,IndiahasbeengrowingatanaverageGDPof8.6%.Foreigninvestment
into India is increasing, Indian companiesare stepping outside their national borders
toacquirecompaniesoverseas,incomesareincreasingandcapitalmarketsarebuoyantreectingthestrengthofthecompany.StudieshavealsorankedIndianconsumersassomeofthemostcondentintheworld.Themorecondentconsumersareaboutthe strength of the economy, their personal
nances,theircareergrowth,etc.,themore they will increase their consumption,
purchasenon-essentialproducts,experiment with products, brands,
categories, etc.
Strong and stable economic growth
Indian consumers are drivingpurchases in: Two-wheelers Skin care Hair care
Apparel Accessories Mobile phones
GDPatcurrentandmarket
prices(USDbillion)
Growthinpercentage
Source: Prime Ministers Economic Advisory Council, Government of India
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Understanding the tax andregulatory framework isessential to starting oroperating a retail businessin India.
FDI in the retail sectorwill benet severalconstituencies and
stakeholders.
#2
#3
We discuss the following aspects of Indias
taxandregulatoryframework,whichisrelevanttoretailerseitheroperatingor
setting up presence in India:
FDIpolicyframework
Directtaxframework
Transferpricingframework Indirecttaxframework
Taxissuesfacedbyretailersoperating
in India
ThebenetsofmoderntradetoIndiawillpositivelyimpactseveralconstituencies.
What are the benets of FDI?
Consumers
Modern trade allows for an explosion ofchoice. Consumers can access products that
improvethequalityoflife.Moderntrade
willbenetconsumersinseveralways:
Availrationalisedpricesthatbetterreectmarketvalueduetocompetition
Accessbetterqualityfoodproductsresultingfromknowledgetransferregarding best practices in grading,
sortingandprocessingtechniques,theestablishment of a robust cold chain
system, etc.
Governmentexchequer
Moderntradeplayersaretax-compliantandarelargetax-payers.Theorganisedretail sector also facilitates the generation
ofsignicanttaxrevenuesthroughthebuilding of a sophisticated supply chain.
This impacts the logistics, transportation,warehousing, freight forwarding and
othersimilarservicesectors,allofwhichcontributetotheexchequerthroughpayment of indirect taxes, primarily the
servicetax.
Farmers/producers
Establishinganefcientsupplychainthatlinksfarmersandsmallmanufacturersdirectlywithretailers,willmaximisevalue
forstakeholders.Togetherwithback-endinfrastructure, this will minimise wastage(especiallyoffreshfoodsandvegetables),increase farmers realisations, encourage
best practices in crop management and
improvefoodsafetyandhygiene.Whileinefcienciesincreaseconsumerprices,farmers suffer from extremely low
realisations.
Unorganised trade
Kiranas(i.e.,mom-and-popstores)canexisalongside modern trade players and can
explorepartnershipmodels(e.g.,sourcing,franchisepartners)inarapidlychangingretailenvironment.
MostmajorglobalbrandsandretailerswhoarenotyetinIndiaareassessingthemarketwithkeeninterest,recognisingitsstrengthsas a retail destination. Indias retail sector is
not yet fully liberalised. That said, the entry
ofsinglebrandretailin2006isviewedasamajorstepforwardtowardsliberalising
thesector.AnotherdevelopmentistheCommittee of Secretaries recommendation,inJuly2011,ofallowingFDIinmulti-brandretail,subjecttoconditions.
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Why should the retail sector beliberalised?
ReducewastageacrossIndiasfoodsupplychain
Whenenteringnewcountries,mostmajorfoodandgroceryretailersengageandwork
with local farmers. Empirical studies in
emergingmarketeconomieshaveshownthat the growth of organised retail results in
severaleventualities:
Technologytransfer
Improvementstothequalityofproducelocallyavailable
Booststolocaleconomysincelocalsuppliers are engaged and integrated
into global retailers food and groceryprocurement practices
Morecompetitivelypricedproducts
Increase employment
FDIinretailwillgenerateemploymentsince new entrants will need to hire staff.
Current employees of unorganised retail
playersdonotreceivehealthcareorotherbenets.Onceindividualsbecomeabsorbedin retailer operations, they can access more
equitablewagesandbenets.Moderntrades effect will be most apparent at thebottom of the population pyramid, as it
willunleashopportunitiessuchasnon-agricultural employment for rural youth
andabetterqualityoflivingfortheexistingagricultural society.
Strengthen Indias position as a sourcing
hub
GlobalretailershavebeensourcingfromIndia for years and their retail presence
intheIndianmarketwillenhanceexportsfromIndia,astheydevelopandleveragerelationships with local suppliers. Most
globalretailerswhohaveenteredIndiahaveexpressed their intentions to source andexport a range of products from the country.
The extent of sourcing from India will
increase when global retailers are allowed
tooperateintheIndianmarket.
FDI creates better retail infrastructure, which helps to supportoverall sector growth.
Accesstofunds
Bestpracticestransfer
Supply chain mastery
Reducedwastageinthefoodsupply chain
More products, better prices
Boosttoemployment
Higherlevelsofsourcingandexports
Highertaxrevenues
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Key success factors arending the right real estate,localising products andmastering the supply chain.
#4SucceedinginIndiasretailmarketisnoteasygiventhefollowing:
Thereisalargeheterogeneousgroupofconsumerswhohavesignicantlyvaryingbuyingpower.
ThemajorityofIndianconsumersarevalue-conscious.
India-basedretailerswitharst-moveradvantagehaveaggressiveandambitious expansion plans.
NewbrandsareenteringtheIndianmarket
Succeeding in Indias retail sector is acombination of the following factors:
#1Securing the right
retail real estate
Whenitcomestotheretailsector,itislocation,location,location!Afundamentalaspectofretailers
operationsistheavailabilityofgoodqualityretailrealestate.
Afewyearsago,therewerenotenoughretailrealestateoptionsandmanyretailerswereforced
torent(high-priced)spacethatskewedtheirprotabilitymetrics.Today,thescenarioisdifferent
inthattherearemoreretailrealestateoptionstochoosefrom.Positivemarketandconsumersentiments, the entry of new foreign brands, incumbents expansion plans and increasing hiring
needsarehelpingdrivedemandforretailspaceinTierIcities.Industrialgrowthandexpansionis
alsoensuringthatseveralretailersareplanningtoexpandoperationstoTierIIandTierIIIcities
giventhatthereareaspirationalconsumersearningincreasedincomeswhowouldlikebetteraccessto products.
#2Localising
products to delight
and excite Indian
consumers
R&D,innovationandnewproductdevelopmentareemergingaskeydriversofsuccess.Aspartofthiseffort,productlocalisationhasemergedasadriverofsales,customerexcitement,customer
interest,etc.Indianconsumers,whiletheywantaccesstoproductsavailableoverseas,alsowantto
feel that a product has been created especially for them.
Localisationcantakeseveralformswhichincludebutarenotlimitedtothefollowing:
CreatingandlaunchingproductsspecicallyforIndianconsumers
MakingchangestostorelayouttoappealtoIndianconsumers
Customisingproductionorfoodpreparationpracticesforculturalsensitivitiesandlocalpalettes
#3Mastering the
supply chain
as a driver of
competitive
advantage
Mastery of supply chain dynamics is a critical enabler for the growth of modern trade. India is a
largeandfragmentedcountryandtheabsenceofstronginfrastructureandlogisticssystemsmakeitchallengingtoreachconsumerslocatedacrossvastdistances.WiththeIndiangovernmentmaking
investmentsintostatehighways,anoveralldeclineoflogisticscostsisboundtooccur.Studies
suggestthatlogisticscostsarebetween10to12%oftotalGDP.
Creatingefcientsupplychainsandachievingcompetitiveadvantageforretailersisafunctionof
the following:
Integratingvendor-managedinventoryprogrammeswithplanningandforecastingprocesses
Integratingcomponentsofthevaluechain Usingamultimodaltransportnetwork
Encouragingskilldevelopment
Usinginnovativetechniquessuchasuseofvoice-basedsolutionsinretaillogistics Leveragingtechnology
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1The Indian economy was liberalised in the
1990s and since then, the country has seen
boomingcapitalmarkets,theemergenceofnewindustries,anevolutioninconsumershopping habits, the entry of global
companies,etc.Indiaisavibranteconomyandsince2005-06,hasbeengrowingatanaveragegrossdomesticproduct(GDP)of 8.6%. The six core industries of crude
oil,petroleumreneryproducts,coal,electricity,cementandnishedcarbonsteelgrew by 6.8% in February 2011 as comparedto 4.2 % in February 20101.Accordingtothe Centre for Monitoring Indian Economy,
privatenalconsumptionexpenditureisprojectedtogrowby7.5%2.
Whiletheinuxofforeigncapitalisincreasing, Indian companies are also
acquiringassetsoverseas.Also,thestrength
The Indian retail sector is one of the most exciting
and underpenetrated markets in the world
Economy and demographicsmake India the envy of manynations.
ofthecountryisreectedinitsgrowingpersonalincome.TheIndiangovernmentis supporting this growth through reforms
andbyimprovingthestateofinfrastructure(roads,highways,ports,airports,specialeconomiczones,etc.).
Powered by strong internal demand, the
country has displayed robust growth whichislikelytobesustainedinthecomingyears.Alargeandeducatedmiddle-classandyoungconsumersarehelpingdrivedemandacrosscategories.StudieshavealsorankedIndianconsumersassomeofthemostcondentconsumersintheworld.Thisis based on the strength of the economy,
personalnances,careergrowth,increaseinconsumption,purchaseofnon-essentialproducts, brand awareness, etc.
Indian economy displays resilience in the midst of global crisis (GDP, %)
Indiamacro-economic details
Source: Prime Ministers Economic Advisory Council, Government of India
Source: Datamonitor Country Insight, 2011
1 http://www.ibef.org/india/economy/
economyoverview.aspx
2 http://www.ibef.org/india/economy/
economyoverview.aspx
Indicator Unit 2010 2011 2012 2013 2014
GDP,purchasingpower
parity(percapita)
International
dollars
3453.826 3777.925 4103.794 4434.577 4819.5
GDP,purchasingpower
parity(percapitagrowth)% 12.013 9.3838 8.6256 8.0604 8.681
Grossdisposableincomeper
household,USD(absolute)
USD 5295.26 6151.04 6867.1 7627.55 8447.7
Grossdisposableincomeper
household,USD(growth)% 16.3786 16.1612 11.6413 11.0738 10.753
Ruralpopulationas%of
totalpopulation(absolute)
% 70.2085 69.9835 69.7581 69.5317 69.304
Urban population as % of
totalpopulation(absolute)
% 29.7915 30.0165 30.2419 30.4683 30.695
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Indias two decadesof growth
GDP per capita (PPP basis) Middle-class consumers (million people)
Foreign investment (USD million) Forex reserves (USD billion)
Literacy (%) People below the poverty line (%)
Average age of house-owner (years) Cellphone subscribers (million people)
Also,Indiasuniquedemographymakesitanattractivemarketforcompaniesoperating across categories. These include
apparel, footwear, accessories, mobile
phones,personalcare,foodandbeverages,hair care, etc.
Indiahasalargeandaspirational
middle-classof75millionhouseholdsor300millionindividuals.Oftenreferred to as the growth engine of
theIndianeconomy,themiddle-classwantsproductswhichprovidevalueformoney.
Indiahasapopulationof500millionunder the age of 25. These young
Indiansareindependent,havehighaspirations and access to money.
Therefore,theydrivepurchasesinmobile phones, fashion, accessories,
foodandbeverages,quickservicerestaurants, etc.
Accordingtothe2010WorldWealthReportbyCapgeminiandMerrillLynchWealth Management, the rise in the
total number of Indian millionaires
withinvestibleassets,excludingmainresidence and consumer durables ofmore than US$ 1 million, grew almost
51%. This is the second fastest in the
Asia-PacicregionafterHongKong.
Indiasruralpopulationof700million presents an opportunity for
R&Ccompanies,whichtheycannotignore. The agriculture sector has been
witnessing record foodgrain output,givingaboosttoagro-industriesandruralincomes.But,penetrationlevelsforseveralproducts,suchaspersonalcare,haircare,skincare,consumerdurables and electronics are low in
ruralIndia.However,R&Ccompanies,who are localising products for the
Indianmarket(pricepoints,packaging,SKUsize,promotion,etc.),
will succeed.
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Number of Indians with investible assets of over US$ 1 million
Source: Capgemini, Merrill Lynch Wealth Management
Ownership of consumer durables by households in rural India
*Estimated households (000s) 157,454. Source: IRS, 2009 R1, Hansa
Research, The Marketing Whitebook 2010-2011 (Businessworld)
All states* DVD
player
Electric
iron
Computer TV Fridge Washing
machine
Digital
camera
Penetration
%
3 12.7 0.3 34.9 5.4 0.8 0.1
The power of Indiasconsumer groups
Rural Indian
consumers
Equivalenttoalmost
halfthesizeofChinese population
(1.3billionpeople)
Largerthan
the combined
populations of
Brazil,Russia,
GermanyandtheUK(484million)
Equivalentto
almostthesizeofthe US population
(312million)
Young Indian
consumers
Middle-class
consumers
USD
millionaires
Shampoo,toothpaste
Someelectronicproducts
Foodandbeverages Two-wheelers
Mobilephones
Apparelandaccessories Apparel
Consumerelectronics
Personalcare
Luxur ycars
Luxuryproducts
Homesandapartments
Major demographic groups are driving purchases across categories
Sources: PwC analysis* Capgemini, Merrill Lynch Wealth Management
**Income levels for middle-class consumers,
according to the NCAER, range from INR140,000
to 780,00o, which using a conversion rate of
USD1 equivalent to INR45, is IUSD3,111 to
17,333.
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Indias retail fundamentals
Market size US$ 350 billion
CAGR 15-20%
Unorganised retail 12millionmom-
and-popstores
Organised retail
penetration
5-8%
Retail density 6%
Contribution to GDP 14%
Demand drivers
Demandingconsumers:Indian consumers aredemandingaccesstoproductsandservicesthat
delightandexcitethem,areofgoodquality,
andprovidevalueformoney.
Increasing incomes: StrongGDPperformance,
capitalmarketgrowthandtheemergenceof
new industries are creating new millionaires
andboostingincomelevels.Thisactsasan
incentiveforconsumerstospendmoreon
products. They are also experimenting with
brands, trying new products, etc.
Evolvingconsumptionpatterns:Traditionally,
the focus of Indian consumers was on
saving.However,positivemacro-economicfundamentals,anevolvingretailmarket,
lifestyleinuencers,etc.areensuringthat
consumersspendmoreacrosscategories.Otheraspects,liketheemergenceofdouble-income
households, easier access to credit and societys
acceptanceofself-indulgence,arechanging
purchasing habits.
Supply drivers
Expansion: The growth of modern trade and
expansion plans are enabling consumers to
easilyaccessretailproductsandservicesacross
urban, Tier II and Tier III cities and towns.
Newentrants:Some of the worlds largest andmostprestigiousbrandsandretailershavea
presenceinIndia.Mostglobalretailersbelievethatthenextwaveofgrowthwillcomefromtheemergingmarketeconomies.Thosewho
havenotyetenteredIndiaareassessingthe
marketwithinterest.
Growthopportunities:Some high growthcategories in the retail sector include the
following:
Childrenswear Accessories
Consumerdurables
Leisure Apparel
Footwear
Indias evolving retail sectoris exciting and dynamic.
PwC research indicates that Indias retail
sector is worth US$ 350 billion and has a
loworganisedretailpenetration(ORP)of5 to 8%. Modern trade emerged during
the 90s, primarily in the food and grocery
sector,andisnowgrowingataCAGRof15to 20%.
AlargemarketpotentialforarangeofcategoriesisindicatedbylowORP,increasing urbanisation, growing incomes,
increasingconsumercondence,etc.
Indias retail sector comprises organised
andunorganisedparticipants.Giventhesizeofthecountrysretailmarket,PwCresearch and other reports suggest that the
12millionmom-and-popstorescomprisingIndiasunorganisedmarketcanco-exist
with modern trade players.
Recognisingthelong-termgrowthpotentialofIndiasretailmarket,someofthecountryslargestconglomerateshaveallocated billions of dollars to launch large
scaleretailinitiativesthatspancash-and-carry,foodandgrocery,books,musicandleisure,gemsandjewellery,footwear,apparel,accessories,etc.India-basedretailincumbents are expanding their presence
across a range of categories, experimenting
withformats,launchingprivatelabels,strengthening supply chain systemsand more.
GlobalretailersarealsoassessingtheIndianmarketwithkeeninterest.Theyhaverecognisedthatthenextwaveofgrowthintermsofgeneratingrevenues,reachingnewcustomers(includingthelargenumberofmiddle-classconsumers)andharnessingresearchanddevelopment(R&D)andinnovativeskillswillcomefromemergingmarkets.PwCs14th Annual Global CEOSurveyindicatedthat93%ofretailCEOsbelievedthattheywillexpandtheirAsianoperationsoverthenext12months.
Whether global or domestic, retailers
want to capitalise on the India growth
story.Anaspiringmiddle-classof300millionconsumers,alargedemand-drivenpopulation of 500 million young consumers
andarelativelyuntappedruralpopulationof700millionpeopleconstitutethegrowthstory.Besides,astrongGDPgrowth,risingconsumercondence,consumption-basedbehaviour,increasingincomesandalargepoolofconsumershavemadeIndiaoneoftheworldsmostattractiveretaildestinations.
Driversfuellingthegrowthoftheretailsector are below:
Indias retail sector is an evolvingmarket. The sector will growand develop over the next four
to six decades, since consumerswill earn more, those below the
poverty line will cross over, thegains from economic growth
will be felt more inclusively,etc. As more retailers enter themarket and expand operations,
consumers buying patterns and
shopping habits will also evolve.Retailers currently operating inthe market, and those who plan
to enter the market, will haveenough time to understand localmarket dynamics, develop robust
supply chains, establish formatsand choose the right product
assortment to meet the needs ofdiverse Indian consumers.
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Opportunities exist across retail categories in India.
Selected high demand categories
Apparel
Demand for:
Brandedapparel
Childrens wear Clubwear
Privatelabel apparel
Uniforms Womensprofessionalattire
Demand in Asia
TheAsianfashionmarketwillwitnessahealthy
averageannualdemandgrowthofapproximately5% through 2014.
Amongglobalfashionretailers,Chinaevokes
condence.
TheIndianapparelmarketisrelativelyuntapped
across categories.
Demand in India
ComparedtootherAsiancountries,theIndian
apparelmarketissignicantlysmaller.However,overthepastfewyears,clothingsaleshave
been increasing steadily. This is supported by
agrowingmarketofyoungconsumersandanincreasing interest in western fashion.
Consumer durables and electronics
Demand for:
Air-conditioners Cameras
Laptops
Mediatablets Mobilephones
Refr igerators TVs
Demand in Asia
In2010,Asiancountrieswitnessedanincreaseinsales of consumer durables.
China,IndiaandHongKongwilldrivegrowthin
Asiaintheapplianceandhousewarecategory.
Demand in India
Most consumer durables sold in India are
manufactured in the country.
Cost is an important factor that determines the
sales of consumer goods. Production capabilities
forbudgetmodelsarealsowelldeveloped.
Food, beverage and tobacco
Demand for:
Cooking
Energydr inks Frozenfoods
Noodles
Ready-to-eatfoods Value-addeddairy
Non-carbonatedbeverages
Demand in Asia
Demandforfood,beverageandtobaccoinAsiais
expected to increase in the next two to four years.
Invalueterms,foodsalesaresettoalmostdouble
fromUS$2.7trillionin2010toUS$4.6trillionin
2014. The growth in demand will be the strongest
inChina,withanaverageof5.7%intheforecast
period of 2010 to 2014. India will witness a 3.2%
averageannualdemandgrowth.
Demand in India
Beer,processedfoods,fastfoodandcoffeewillbe
strong sellers during the forecast period.
Groceriesaccountfortwo-thirdsofIndiastotal
retailsalesandwereadriverofgrowthin2009.
Innovationsinpackagingaremakingproducts
more affordable.
Source: PwC analysis. Strong and Steady 2011 Outlook for the Retail and Consumer Products Sector in Asia
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Indias modern trade category comprises global and domestic participants
Food and grocery ApparelConsumer electronics/durables
Global Carrefour
MaxHypermarket-SPAR
Metro
Tata Tesco
Indian Bharti-Walmart
FoodBazaar
More
NaturesBasket
RelianceFresh
Spencers
Global Diesel
Esprit
Levis
MangoMarks&Spencer
Indian Chemistry
Dolphin
LilliputMustard Seed
Provogue
WillsLifestyle
Footwear
Global Aldo
Bata
Charles&KeithHushPuppies
Nike
NineWest
Indian CatwalkInc. 5
RelianceFootprint
Woodland
Global BangandOlufsen
Bose
LG
SamsungSony
Whirlpool
Indian Croma
eZone
Pai Electronics
RelianceDigitalThe Electronics Store
Viveks
Luxury products
Global Chanel
ChristianDior
LladroLVMH
MontBlanc
Indian AmrapaliManishArora
RohitBal
RituKumarTarun Tahiliani
TitanNebula
Watches
Global Baume&Mercier
Cartier
ChopardCitizen
Longines
Omega
Indian Ethos
Fastrack
Helios
Titan
Watches and More
Sincethemid-tolate2000s,someofIndiaslargest conglomerates set aside billions of
dollarstolaunchlarge-scaleretailinitiatives
spanningfoodandgrocery,cash-and-carry,apparel,footwear,gemsandjewellery,etc.
Reliance Retail Bharti Retail AV Birla Retail
ProjectedinvestmentofUS$5.5billioninfood
and grocery, leisure, apparel, accessories, gems
andjewellery,hypermarkets,homeandliving,
eyewear, etc.
ProjectedinvestmentofUS$2.5billionin
cash-and-carryandfoodandgrocery.
ProjectedinvestmentofUS$2.5billioninfood
andgrocery.Marketrumorssuggestthatthe
retailer may launch an offering in specialty retail.
Retailersuseamixofformatsthatincludethe following:
Cash-and-carry
Conveniencestores Departmentstores Discountorvalue E-commerce
Hypermarkets Malls Shop-in-shop
Specialtyretail Supermarkets Ruralretail
Sector snippets
Retailers are using a mix of formats whichconsider availability of the right real estate,fundamentals relating to the catchmentarea, value propositions, etc.
A relatively new but rapidly growing retailformat is the online channel, which offersconsumersconvenience,pricebenetsand
the ability to shop 24 hours a day.
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Category: Online commerceFlipkart:PioneeringIndiasonlinecommercemarket
Sector snapshot
Company prole
Flipkart:Offeringnewcategories,reachingmorecustomers,expandingoperations
Online retail is nascent in India and will over time, evolve and
more closely
PwCs thought leadership report Strong and Steady - 2011
Outlook for the Retail and Consumer Products Sector in Asia
predictsonlinecommercetobethenextmajorareaforretailgrowth
inAsia.Thoughnascent,Indiasonlineretailmarketisgrowingatdouble-digitratesandislikelytobethenextformatthatretailers
will incorporate into their array of channels.
Growthdriversincludethefollowing:
Internetpenetration,theuseofbroadband,etc.aremakingiteasy(andquick!)forconsumerstoshoponlineathome,attheofce,etc.
GlobalandlocalE-commerceparticipantshavelaunchedwebsites that offer Indian consumers a range of products
(apparel,babyproducts,electronics,etc.).
Themarkethasseentheemergenceofarangeofbuyingpropositions, such as group buying sites, direct sales sites, etc.
Consumersaremorewillingtoexperimentwithnewformsofretailpurchaseandfeelcondenttosearchforandbuygoodsonline.
Convenience,speedand24-houraccessibilityinpurchasingproductsisbeingvaluedincreasingly.
Indias E-commerce market is growing at 20 to 30% CAGR and
Flipkartoffersarangeofgoodsonline,includingbooks,music,
consumerelectronics,etc.SeveralfactorsaredrivingthegrowthofIndiasonlineretailmarket,includinginternetpenetration,theconvenienceofpurchasingproductsonline,etc.SeniormanagementatFlipkartbelievesthatconsumerbehaviourischangingandinafewyears,Everyonewillbebuyingeverythingonline,justliketheybuyonlytheirticketsonlinetoday.Asthemarketevolves,sowillthe consumer.
online retail players have aggressive growth plans.
By2013-14,Flipkartplansto:
Offernewcategoriesonitswebsite
Increaseitsfootprintofwarehouses
Expandoperationsintonewcities
Increasestaffsizefrom2000toover10,000
Growrevenues10 to 30 times over
resemble E-commerce markets in mature retail environments.
Since2007,PwChasbeenconductingsurveysononlineshopping,intheUK,examiningnewandemergingretaildevelopmentsinthedigitalspace.Sincethen,thevalueofonlineretailhas
increasedtoalmosteightpercentofthetotalretailmarket,withgrowthexpectationsof10%peryear.Interviewswithmorethan1,000consumersinthelastquarterof2010revealedthatwearewitnessinganewpatterninconsumerbehaviour.WhenPwCbeganthisseriesin2007,only63%ofthepeoplewespoketowereactuallyusing the internet regularly to shop. In 2010, things had changed.
Nearly20%ofrespondentswerespendingmorethanhalftheirdisposable income online.
Fourteenpercentwerebuyingonthewebeveryweek.
Fourteenpercentweredoingitmoreoftenagurethatwasfour percent only two years ago.
Customer insights
Indianconsumersaregenerallyperceivedasprice-drivenandvalue-conscious.Whilethatmaybetrue,seniormanagement
atFlipkartbelievesthattheironlineconsumerisdrivenbybothpriceaswellasaminimumlevelofquality(intermsoftheend-to-endexperience).Astheeconomygrows,incomesriseandaspirationsincrease,theIndianconsumerwillevolveinto
amorequality-consciousconsumer.
Source: Pick n Mix - Meeting the Demands of the New Multi-channel
Shopper, PwC
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Customerservicewillbeacriticalsuccessfactorforonlineretailers.
Customer service and satisfaction
Flipkartmaintainscustomerserviceteamstomanagecustomerqueries,trackthemovementofgoodsordered,ensuretimelydelivery,etc.ProvidinggoodcustomerserviceenablesFlipkarttoenjoyhighlevelsofcustomersatisfaction,generaterepeatbusinessandensurepositiveword-of-mouth.
Seniormanagementbelievesthatastheretailsectorevolves,customersatisfactionwillbeakeydriverofsuccessformostbrands and organisations.
Customerserviceisimportantforonlinecustomerssinceitbuildstrustandcomfort.WhenonlinecustomershaveapositiveexperiencewithFlipkartscustomerservice,theyconveythistotheirfriends(word-of-mouth).
Social media
Aspartofitseffortstoenhancethecustomerexperience,Flipkartmanagesitssocialmediapresencecarefully.ApartofFlipkartscustomer support team manages the companys presence on
FacebookandTwitter.Onlyveorsixofthe200tweetseachdayarenegative.ThegroupsSLAforrespondingtonegativefeedbackonsocialmediasitesisonehourbutonanaverage,customersareresponded to within 15 minutes.
Source: Discussions with senior management at Flipkart, PwC analysis
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Retailers are expanding operations.
Key trends
Growthofprivatelabels
Most retailers in India are bullish about
thesuccessoftheirprivatelabelproductsacrossfoodandnon-foodcategories.PwCs
Strategic Issues for Retail CEOs indicatesthatretailersarelaunchingnewprivatelabelofferings,enhancingtheirprivatelabel portfolios and will be launching
robustpromotionalofferstoquicklymovetheirownbrands.Indiasmajorretailersareexpectedtoembarkuponthefollowingstrategiesfortheirprivatelabelproducts: Increasetherangeofofferings Increaseshareofrevenuefromprivate
label sales
Embarkuponpromotionaloffersandsales
Increasethevisibilityofproductsin
store outlets Offerselectedproductsthroughother
retailers outlets
Experimenting with formats
Most of the large modern trade players are
experimenting with formats and launching
hypermarkets,supermarkets,electronickiosks,shop-in-shops,etc.Retailersarealsoexperimentingwithsizeevenwithinthe same format category. For example,
insteadofhavingonestandardsizeforhypermarkets,someretailersarevaryingthesizeaccordingtoconsiderationslike
realestaterentals,thesizeofthecatchmentarea,etc.Thehypermarketisapopularformat especially for many of Indias
foodandgroceryoperators.AccordingtoPwCs thought leadership report Strong
and Steady 2011 Outlook for the Retailand Consumer Products Sector in Asia,
HypermarketexpansionissweepingacrossAsia,withChinainthelead.
Increasingconsumercondence
ReportssuggestthatIndianconsumersaresomeofthemostcondentintheworld.Buoyedbyasenseofcondenceintheeconomy,theirjobprospects,industrialgrowth,capitalmarkets,etc.,theyaremorewillingtospendacrossnon-essential
product categories. The increasing use ofcredit cards has enabled consumers to buyproducts that may be out of their reach.
Key issues to address
Infrastructure and supply chain
Theabsenceofworld-classroads,highways,ports,etc.isamajorchallengeforretailerswhoarelookingtomovegoodsefcientlyfrom point of source or procurement
totheshelf.Relatedtothisistheideaof supply chain, logistics, warehousingand distribution. Indian retailers are
experiencinghighlevelsofdemandandneedtodeliverontimebymanagingstockkeepingunits(SKUs),maintaininginventory,guardingagainststock-outs,etc. The use of IT optimisation systems and
overallsynchronisationfrombothsuppliersand retailers will enable the latter to use
supplychainefciencyasaleverforsuccess.
Aheterogeneousmarket
Indianconsumersvaryintermsofsocio-economicgrouping,educationlevels,attitudes,purchasedrivers,buyingpreferences,behaviours,etc.Asaresult,itbecomesimperativefor
storestostockamixofmerchandise.
Indianconsumersareoftenreferredtoasvalue-conscious.Thisdoesnotnecessarily imply that consumers want
asteal.Instead,theywantawell-madeproduct that is priced fairly, and thatmeets its stated promises.
Indianconsumersaredemandingaccesstomore,improvedandbetterpriced products.
Workforcemanagement
Retailisarespectablecareerpaththatprovidesopportunitiesforadvancementformenandwomeninrural,semi-urbanandurbanIndia.
Theretailsectorisrelativelynewin India considering modern trade
emerged in the 90s. Therefore, there isan absence of retail training academies
Some large modern trade players areeither establishing their own retail
academies or are partnering with
businessschoolstodevelopretailaccreditationprogrammestodevelopretail talent.
Indias retail sector is a study in evolution.
WeoutlinetheveforcesshapingtheIndianretail sector:
1. Splurging is pleasurable.
Prior to the liberalisation policy, shoppingwasviewedasafunctionalnecessityi.e. buying only the essentials and not
purchasing extra or unnecessary products.
Infact,unnecessaryshoppingorself-indulgencewasfrownedupon.However,increasingincomes,frequentoverseastravel,exposuretotheinternet,growingcondenceinonespersonaldrivers,etc.aremakingitacceptableto:
Buymorenon-essentialproductsthanbefore
Switchbetweenproductsandbrands,oftenmakingrstpurchasesinnewcategories
Splurgeonluxuryproductslikenewineandscotch,expensivehandbags,brandedjewellery,etc.
2.Innovationisimperative.
Today,thefocusoninnovationandR&Disgreaterthanbefore.R&Ccompanieswho
want to assume leadership positions will use
R&Dandinnovationasaleverforgrowth.
Sector snippets
Indian consumers are value- conscious.Private labels offer consumers the twin
benetsofqualityandvalueformoney.
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Newproductsarebeinglaunchedacross a range of categories that include
privatelabels,apparel,footwear,consumer durables and electronics,personal care and grooming, hair care,
skincare,etc.
Competitorsareestablishinginnovationcentres in order to prepare for future
growth, capture new target consumers,
etc.HiringR&Dtalentiscriticalindevelopingworld-classcentresofexcellence. Most global companies
recognisethatthenextwaveofgrowthwill come from India and China. Thesebrands are committed in increasing
theirR&Dexpenditureandinnovatingproductstocatertothesemarkets.
Companiesareincreasingtheirefforts to hire senior staff and support
teams. They are entrusted with roleofinnovatingnewproducts,productdevelopment,R&D,understandingconsumerbehaviour,etc.
Asthemarketbecomesmorecrowded,product differentiation will be critical
and will separate todays leaders from
tomorrowsgame-changers.
3. Shopping with family is fun!
Toenjoytheirincreasedspendingpower,Indians typically prefer to shop in the
companyoftheirfamiliesbyvisitingmalls,lookingatbrands,experimentingbetweencategories, etc. Some retailers and brands
havelaunchedfamilystorestocatertomen,women and children.
Realestatedevelopersarealsocreatingspaces where retail and entertainment
converge,makingitafunexperienceforthe whole family. Modern trade has made
shoppingenjoyable,withmallsofferingmultiplexes, restaurants and food courts, a
range of shops, arcades for children, etc.
Innovate Create Dominate
Winning the game of innovation
Lifecycleleadership
Rapidlyevolvingcustomer
demands, technology,
competitor actions, etc. are
ensuring that product lifecycles
shrink.Companies that continually
innovateandlaunchnew
products will extend the
longevityoftheirproductsandproduct categories.
Localmarketneeds
EstablishingR&Dand
innovationcentresinregionalareas enables global companies
to create products that meet
localmarketneeds.Whileproducts may be similar in
termsoftheavailabilityof
product lines around the world,
localmarketnuancesexistin
termsofproductsize,pricing,
fragrance,look-and-feel,etc.
Game-changingideas
R&Dandinnovationlabscan
helpcompaniesidentifygame-changing products.
Discontinuousinnature,
theseproductscanredenea category, create new
opportunitiesforgrowth,make
products obsolete and help
companies establish leadership
positions in the minds of
consumers.
4.Theconsumerisking.
Indiasretailsectorisdevelopingquicklyandbecomingmorecompetitive.R&Ccompanies understand the importance ofmeeting the demands of Indian consumers.
Non-performancewillresultinconsumersmigrating their preferences and purchasestootherbrands.Retailersneedtodevelopand offer products which meet consumerdemands and also delight and excite
them.Tomeetconsumerdemands,R&CcompaniesareusingR&Dasameanstolaunch new products.
Privatelabels:Consumerswantqualityproductspricedcompetitively.Priceisthe primary determinant of purchase
for many Indian consumers.
Premiumpersonalcare:Withaccesstotheinternet,frequentforeign
travel,increasingdesiretoexperimentwithproducts,apre-occupationwith celebrity culture, etc., Indian
consumerswanttolook,feelandsmellgood.
Non-carbonatedbeverages:Consumersare focussed on health and wellness
andwanttoconsumehealthyjuice-based,energyorfortiedbeverages.
Ready-to-eatmeals:Consumersleadbusylifestylesandwantconvenienceinthekitchen,theabilitytopreparemealseasily, etc.
5.Customerservicecanbeimproved.
AstheIndianmarketplacebecomesincreasingly crowded with new entrants,
customerservicewillbeakeyfactorindeterminingprotabilityandsurvival.
Today,Indianconsumersareoodedwithdiverseproductsandservices.Therefore,it is important for retailers in India to
providegoodcustomerserviceasameanstoencourage repeat purchases and build brand
loyalty.Retailersinmaturemarketshaveusedcustomerserviceasatooltogeneratefootfallsandcreateapositivebrandimage.Theyhavedevelopedconsumer-friendlypolicies in terms of return and exchange,
loyalty programmes, customer appreciation
days,etc.Customerserviceaimsatthefollowing:
Tohelpconsumersdifferentiate
between retailers Togeneratecustomerloyalty
Toincreasepurchases
Tocreateapositivebrandimage
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Category: Value fashionMaxRetail:Offeringvaluefashionatkeenprices
Sector snapshot
Company prole
MaxRetail:Fashionneednotbeexpensive!
Growth opportunities exist in Indias apparel market
PwCs thought leadership report Strong and Steady - 2011
Outlook for the Retail and Consumer Products Sector in Asia
indicatesthattheIndianapparelmarketisrelativelyuntappedacrossallcategories.Clothingsaleshavebeenrisingsteadilyin
recentyears,supportedbyalargemarketofyoungconsumersandanincreasinginterestinWesternfashion.Apparelcompaniesareusingmarketingstrategiestobuildtheirbrand,increaseawarenessandcreateafashionable,lifestyle-orientedimage.
Efforts to raise funds from PEs are enabling apparel brands to grow
theirstorenetworks,boostproductioncapacity,offernewstyles,hiredesigntalent,developlargerformatstores,establishshop-in-shops, etc.
Maxs focus on providing fashion at keen prices is generating strong
current growth
Keenlypricedapparelispricedlesserthanaffordablypricedappareleven!Keenlypricedapparelisespeciallyimportantindevelopingmarketssincecustomersneedtobeeducatedaboutfashion,beforemakingthepurchase.Maxusesitsdesignstrengthtoproducesharply-pricedapparelthathasahighfashioncomponent.DesignersintheMiddleEastalongwiththoseinIndiacreateandlocalisefashionforglobalandlocalmarkets,respectively.
and presents long-term potential for its parent company,
Landmark Group.
ByMarch2013,Maxwilloperate100stores,doublingoperationsfrom the current 51 stores.
MaxistheLandmarkGroupsfastestgrowingofferinginIndia,acrossitsformats(foodandgrocery,departmentstores,apparel,etc.).
Tier2citieslikeCoimbatore,Indore,Bhopal,etc.areshowingstrong growth. Consumers in these locations are aspirational and
viewMaxasastrongfashionbrand.
across men, women, children, value, premium, plus-size, etc.
FormanyIndians,lowpricesareakeypurchasedriver.
Thefollowingfactorsdrivethegrowthofvaluefashionretail:
IncreasingincomesareenablingIndianconsumerstospend
more and experiment across products, brands and categories. Apparelisnolongerafunctionalcategorybutonethatconveys
appearance, prestige and image. Consumers want to buy
apparel that is both affordable and fashionable.
Thegrowthofmoderntradehashelpedincreasethedemandforbothbrandedandvalueapparel.This,coupledwiththeemergenceofnewsectorsandprofessionaljobopportunities,hasalsohelpeddrivedemandforofcewear.
Over50%ofIndiaspopulationisunder25.YoungIndiansareaspirational, demanding and focussed on apparel that is both
fashionable and affordable.
Currentpenetrationofapparelintheorganisedretailcategoryis 10%. This is expected to increase to 30 to 35% by 2015.
Clothing: Market demand growth (% real change) pa
Source: Strong and Steady2011 Outlook for the Retail and Consumer Products
Sector in Asia, PwC, 2010-14 are forecasts
Country 2010 2011 2012 2013 2014
China 10.9 10.8 10.3 10.9 11.4
India 6.1 7.6 8.4 8.3 8
Japan 1.6 1.2 1 0.9 0.8
Taiwan 3.9 4.8 4.2 3.4 3.8
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FourcriticalsuccessfactorshelpdenethewinnersinIndiasapparelmarket.
Source: Discussions with senior management at Max Retail, PwC analysis
Fashion
and pricing
ProvidingfashionatverycompetitivepricesisamajordriverofsuccessforMax.Maxdoesnotcompromise
fashionforpriceorviceversa.Providingapparelthatisbeyondnormalpricinglevelshasenabledthechainto
growrapidlybothwithintheLandmarkGroupandwithinIndia.Partofofferinggoodfashionislocalisingthestyling(necklines,hemlines,colours,embroidery,etc.).Maxlocalisesone-thirdofitsproductrangesourcedfrom
itsglobalheadquarters,enablingittobeglobalandconnectlocal.
The
customer
experience
Customerneedsandexpectationsevolvegiventheirexposuretointernationaltravel,media,theInternet,etc.Today,theIndianconsumerexpectsabetterexperienceoverall:
Availabilityofapparel:Theconsumerwantssharplypriced,fashionableappareltoexpandtheirwardrobe
bothattheworkplaceandathome.Customersnolongerwanttodressupjustforwork,theyalsowanttolookgoodathome,implyingaccesstochoiceandrange.
Storeexperience:Fromthetimeacustomerentersthestoretowhenshe/heleaves,she/hemusthaveagoodexperienceacrossseveraltouchpointsthatinclude:
Trialroom|Interactingwithstaff|After-salesexperience|BillingatthePOS|Storeambience
Freshness
of category
Freshnesstakesintoaccountnewproductpromotions,newdesigns,newcolours,newstyling,etc.Keeping
fashionexcitinghelpsengageandretaincustomers,resultsinsales,generatesrepeattrafc,etc.
Long-term
business
model
Participantsneedtobuildasustainablebusinessmodelgiventhatthegestationperiodforsuccessintheretailsectorislong.Sustainableproductpricing,offeringproductsthatimplylongevity,expandingoperationsina
calibratedbutdeterminedmanner,etc.aresomeofthewaysinwhichretailerscanconveytheircommitmentto
buildingalong-termpresence.
applicable for all retailers
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2MostmajorglobalbrandsandretailerswhoarenotyetinIndiaareassessingthemarketwithkeeninterest,recognisingitsstrengthsas a retail destination. Indias retail sector isnot yet fully liberalised. That said, the entry
ofsinglebrandretailin2006isviewedasamajorstepforwardtowardsliberalisingthesector.AnotherdevelopmentistheCommittee of Secretaries recommendation,
inJuly2011,ofallowingFDIinmulti-brandretail,subjecttoconditionalities.
FDI policy framework
Indiahasanopen-armpolicyforregulatingFDIintothecountry.Underthecurrentpolicy,foreigninvestmentispermittedinvirtuallyallsectorswithoutgovernmentapproval,exceptforafewsectorsofstrategicimportance(suchasbanking,defence,media,telecom)wherepolicyprescribesequitycapsorcertainconditions
forobtainingpriorapprovalfromthegovernment.
TheFDIpolicyisframedbytheDepartmentofIndustrialPolicyandPromotion(DIPP),the Ministry of Commerce and Industry and
implementedbytheReserveBankofIndia(RBI)forcasesfallingundertheautomaticroute(i.e.notrequiringpriorgovernmentapproval).Forcasesunderthegovernmentroute,approvalisgrantedbytheForeignInvestmentPromotionBoard(FIPB),whichincludesrepresentativesofvariouscentralgovernmentministriesandgrantsapprovalonacase-by-casebasis.
Apartfromthesectorswhichareofstrategicimportancethatrequiregovernmentapproval,thereisasmalllistofsectorsinwhichFDIiscurrentlyprohibited.Presently,thislistincludesretailtrading(exceptforsinglebrandretailtrading).
WeprovideanoverviewoftheFDIpolicyframeworkprevalentforthetradingsectorin India:
Selecting the right investment and transaction
structure is key to developing a presence in
Indias retail market
Understanding Indias taxand regulatory frameworkis important.
A. Wholesaletrading
Forwholesaletradingorcash-and-carrywholesaletrading,100%FDIispermitted,withoutgovernmentapproval.However,thegovernmenthasprescribedcertainoperational guidelines for companies in the
wholesale trading sector.
Someofthekeyprinciplesemergingfromthis operational guideline are set out below:
Wholesaletradingisdenedasthesaleof goods or merchandise to retailers,
industrial, commercial, institutional
or other professional business usersor to other wholesalers and related
subordinatedserviceproviders.
Theyardstickfordeterminingwhethera sale is wholesale or not is the type of
customer to whom the sale is made,
andnotthesizeand/orvolumeofsales
Licences/registrations/permits,asspeciedundertheacts,regulations,rules,ordersofthegovernment,arerequiredforwholesaletradingoperations.
Salesunderwholesaletradingcanonly be made to customers holding thefollowing registrations/licences:
- Entitiesholdingsalestax,VAT,servicetax,excisedutyregistration
- Entitiesholdingtradelicences
- Entitiesholdingpermits/licences,etc.forundertakingretailtrade
(likelicencesforhawkers)fromgovernmentauthorities/localselfgovernmentbodies
- Institutionswithcerticatesofincorporation or registration asa society or registration as public
trustsforself-consumption
Fullrecordsofsalesneedtobemaintained by the wholesale trading
company on a day to day basis
Wholesaletradingofgoodstocompanies within the same group
should not exceed 25% of the total
turnoverofthewholesaleventure.
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B. E-commerceactivities
E-commerceactivitiesarealsogovernedbytheprinciplesmentionedabovei.e.companiescanengageonlyinBusinesstoBusiness(B2B)E-commercetradingandnot in retail trading.
C. Testmarketing
Withpriorgovernmentapproval,100%FDIispermittedforthetestmarketingofitemsforwhichacompanyhasapprovalfor manufacture, for a period of two years.
Thisistrueprovidedinvestmentinsettingup a manufacturing facility commences
simultaneouslywiththetestmarketing.
D. Retailtrading
FDIupto51%ispermittedwithpriorgovernmentapproval,fortheretailtradingofSingleBrandproducts,subjecttothefollowing conditions:
Productssoldshouldbesinglebrandonly.
Productsshouldbesoldunderthesamebrand internationally.
Singlebrandproduct-retailingwillcoveronlyproductswhicharebrandedduring manufacturing.
Theforeigninvestorshouldbetheowner of the brand.
ApplicationsseekinggovernmentpermissionforFDIintheretailtradeofsingle brand products are to be made to
theDIPP.Theapplicationshouldspecicallyindicate the product or product categoriesproposed to be sold under the single brand.
Anysubsequentadditiontotheproductsor product categories to be sold under the
singlebrandwouldrequirefreshapprovalfromtheGovernment.
E. RecentdevelopmentsThepossibilityofFDIinmultibrandretailtrading
InJuly2010,theDIPPreleasedadiscussionpaperinvitingpubliccommentsonissuesconcerningFDIinmulti-brandretailtrading. This discussion paper included an
analysis of the following:
Thecontributionoforganisedandunorganised retail to the Indianeconomy
TheneedforFDItollthegapsthatexist in the Indian system in terms of
weakback-endinfrastructure
TheimpactofFDIpermissibilityon
the retail sectors in China, Thailand,Russia,ChileandIndonesia.
TheviewsofstakeholderswereinvitedonissuessuchastheproposedFDIcaptobeimposed,mandatoryinvestmentindevelopingback-endinfrastructure,minimum employment opportunities
for rural youth, minimum percentageof sourcing from the small and medium
enterprises(SME)sector,theintegrationofsmall retailers in the upgraded supply chain,etc.
Morethan250responseswerereceived
and a panel, including members fromvariousministries,wassetuptoanalysethe responses and formulate the policy on
thegovernmentpermittingFDIinmulti-brand retail trading. The matter is currently
underconsiderationbythegovernment.IfitisdecidedtoallowFDIinmulti-brand retail trading, it is expected thatthe policy will impose certain obligations
onforeigninvestorssuchasaminimumcapital infusion and the use of funds for the
developmentofanorganisedtradingretailinfrastructure.
AnotherdevelopmentistheCommitteeof
Secretaries recommendation, in July 2011,ofallowingFDIinmulti-brandretail,subjectto conditionalities.
Property/real estate
FDIupto100%ispermittedundertheautomaticrouteforconstruction-developmentprojects(includingshoppingmalls),subjecttocompliancewithcertainminimum area and capitalisation conditions
being met.
Inmostcities,itisdifculttondsuitableproperties in central and downtown
locations for large format retail stores,
primarilyduetofragmentedprivateholdingsandtheinfrequentauctioningoflargegovernment-ownedvacantlands.Thishas led to a shift in preference towards the
suburbs of cities.
Agriculture procurements
StatesandunionterritorieshaveenactedtheAgricultureProduceMarketingCommittee(APMC)Actregulatingtheprocurementofagriculturalandsheriesproduce, including fresh fruits and
vegetables.AfewStatespermitdirectprocurementfromfarmers.Othersrequirethe agricultural produce to be brought into
designatedmarketyardsandsoldthroughan auction mechanism.
Withaviewtostreamliningtheprocurementsystem,thegovernmenthasaskedstategovernmentstoreviewtheir
APMCActsandenabledirectprocurementfrom farmers, besides simplifying the
procedures.
Thegovernmenthasalsotakenmeasurestoimprovetheexistingsupplychainandfacilitatingfarm-to-forkintegration.Forexample,taxbenetshavebeenprovidedand foreign currency loans are permissiblefor establishing cold chain storage facilities.
Other important considerations
Someoftheothersignicantpolicyconsiderationsthataforeigninvestorshouldkeepinmindforsettingup/carryingoutretail operations in India are highlightedbelow:
Highstampdutiesontransferofproperties,varyingbystate
Rigidlanduseandzoningpoliciesthatmaketheconversionoflanduserightstime-consumingandcomplex
Legalprocessesfordeterminingcleartitleofownershiptoavoidpropertydisputes
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Foreigntradepolicytoregulatethephysical import of goods and the issueof licences for it
Arobustcontractlawfortradeactivities
Withaviewtoensuringfairtrade,thegovernmenthasputinplacea
CompetitionActwhichdealswithanti-competitiveagreementssuchasprice-xing,bid-rigging,jointboycotts,etc.,aswellasabusivepracticesundertakenby dominant entities such as predatory
pricing,abusiveconditionsofsupplyand the regulation of combinations.
Trademarkandcopyrightregistrationsare an important aspect for protecting
intellectualpropertyrights(IPRs)inthecountry.RegistrationundertheTrademarksAct1999andCopyrightAct1957canbeusedbyretailerstoprotecttheirIPRsinIndia.
Entity options for doing business
Entrants to the retail sector also need to
decide on the model they intend to use foroperating in India. For example, whether to
enterintoajointventurearrangementwithanexistingcompanyinIndiawithequityparticipation, whether to enter into a plain
franchise arrangement with an existingIndian company, etc.
Typically in these arrangements, tax and
regulatory issues need to be addressedupfrontthe manner of funding the
operations, the repatriation options, thecharacterisation of receipts from and
payablestoforeigninvestors.Moreover,tax authorities generally scrutinise thecommercial terms of arrangements to
determine whether the foreign companyis carrying on business in India through a
permanent establishment.
Such issues would also depend on the entity
vehiclechosen.ThefollowingentityoptionsareavailabletoretailinvestorsasanIndiaentry strategy:
Liaisonofce:Canonlyactasacommunication channel for the
overseasgroup.
Branchofce:Canundertakelimitedactivitiessuchasimport/exporttrading,consultancyservices,etc.
InvestmentinanIndiancompany:Will
besubjecttoactivitiespermittedundertheFDIpolicyofthegovernmentofIndia. In context of the trading sector,
pleaserefertothesectionentitledFDIpolicyframework.
Limitedliabilitypartnerships(LLP):AnLLPisaveryeffectiveandtax-efcientoption for cash mobilisation purposes.
ForeigncompaniescansetuporinvestinLLPsengagedinactivitiespermittedfor100%FDIundertheautomaticroute.
Direct tax framework
IncometaxisacentralsubjectinIndia.Therearenostate-levelincometaxesprovidedforundertheIndianscalsystem.TheincometaxprovisionsarecodiedintheIndianIncomeTaxAct,1961(theAct)andtheIncomeTaxRules,1962(theRules).TheActisamendedfromtimetotime, including through annual Finance
BillsthatarerequiredtoberatiedbybothHousesofParliament.TheCentralBoardofDirectTaxesisempoweredtoissuecircularsandnoticationswhichaidintheinterpretation of the law. The tax year in
Indiarunsfrom1Aprilto31Marchofthesucceeding year.
AcorporateentityincorporatedinIndia(referredtoasacompany)issubjecttotaxataneffectiverateof32.45%.Theincomefrom business operations is computedby following the generally acceptable
principles of accounting regarding the
recognitionofrevenue.However,thededuction of certain expenses is admissible
inaccordancewiththeprovisionscodiedintheAct(e.g.deductionsforthepaymentof taxes, employee dues, etc. are allowed on
apaymentbasis).Further,anyexpenditure
subjecttowithholdingtaxisallowedasadeduction only in the year in which taxes
aredeposited.Anyexpenditureincurredincontraventionofthelawornotforbusinesspurposesisnottax-deductible.Thereisno concept of a group scheme of taxation
in India.
Acompanyisalsosubjecttotheminimumalternatetaxprovisionswherebyacompanyisliabletopaytaxataneffectiverateof20.01%ofthebookprots(computedinaprescribedmanner)ifthistaxishigherthanthetaxpayableunderthenormalprovisionoftheAct.
TheActdoesnothaveanyspecictaxationregime for companies engaged in retail
operations.Therearesomesector-specicincentivesforcoldchains,warehousingfacilities for storage of agricultural
produce, etc.
Businesslossescanbecarriedforwardfor a period of eight tax years and offsetonlyagainstbusinessprots,whereastax depreciation can be carried forward
indenitely.Carry-backisnotpermitted.
DirectTaxCode(DTC):ontheanvil
On12August2009,theIndiangovernmentreleasedthedraftDTCforpublicdebate.Theobjectivewastomoderatethetaxratesandsimplifytaxlaws.Alldirecttaxesincluding wealth tax and income tax willbe brought under one code. Public and
stakeholderfeedbackontheproposalswasanalysedbythegovernment,and
suggestionsforamendmentsreceivedfromthe public, business associations and other
bodiesweretakenintoaccount.
AreviseddiscussionpaperaddressingthemajorissueswasreleasedinJune2010.Furtherfeedbackwasreceivedonit.TheDirectTaxesCodeBill2010wastabledinParliamenton30August2010asanoutcome of this process.
AsummaryofthesignicantproposalsoftheDTCisasfollows:
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- CompanieshavingaplaceofeffectivemanagementinIndiaat any time in the year will be
considered to be resident in India.
- ControlledForeignCorporation(CFC)provisionsareproposedtobeintroducedasanantiavoidance
measure.- TheprovisionsoftheDTCorthe
DoubleTaxAvoidanceAgreement,whicheverismorebenecialtothe taxpayer shall apply, except inthe following circumstances:
WhenGeneralAntiAvoidanceRules(GAAR)provisionsareinvoked
WhenCFCprovisionsareinvoked
Whenbranchprottaxislevied
- TheDTCcontainstheprovisionsofGAAR,underwhichtheincometaxauthoritieshavebeen empowered to declare anarrangement as impermissible if
it has been entered into with the
objectiveofobtainingataxbenetandlackscommercialsubstance.
Transfer pricing framework
With the introduction of formal transfer
pricing(TP)regulationsin2001,inlinewithsimilarregulationsprevalentinother
developedcountries,TPhasemergedasthe single largest source of tax litigation for
multinationalcorporations(MNCs)inIndia.TheprovisionsofIndianTPregulationsapply to international transactions entered
intobyMNCswiththeiroverseasassociateenterprises(AEs).Theyprescribethatintragroup transactions should meet with
the arms length standard and prescribed
documents in this regard should bemaintained.
Aninternationaltransactionisatransactionbetweentwo(ormore)AEsinvolvingthefollowing:
Thesale,purchaseorleaseoftangibleor intangible property
Theprovisionofservices
Costsharingarrangements
Thelendingandborrowingofmoney
Anyothertransactionhavingabearing
ontheprots,income,lossesorassetsof such enterprises
TheAErelationshipisdeterminedbasedonthe participation by one enterprise, directly
or indirectly, in the management, controlor capital of the other enterprise. Some of
the situations where two enterprises can
becomeAEsareasfollows:
Directorindirectholdingof26%ormorevotingpowerofanenterpriseby the other enterprise or by the same
person in both the enterprises
Guaranteeingbyanenterpriseof10%
or more of total borrowing of the otherenterprise
Appointmentbyanenterpriseofmorethan 50% of the board of directors or
oneormoreexecutivedirectorsofanenterprise,orappointmentofspecieddirectorships of both enterprises by the
same person
Completedependenceofanenterprise(forcarryingonitsbusiness)ontheintellectual property licensed to it bythe other enterprise, etc.
Where a transaction is entered into with
an unrelated party and there exists a prioragreement in relation to this transaction
betweentheunrelatedpartyandtheAEs,eventransactionswithunrelatedpartiescanfall into the ambit of TP regulations.
TheTPregulationsrequireanyenterprisethat has entered into any international
transaction(withanAE)duringanancialyear to maintain prescribed information/
documents,obtainandfurnishareport(tothetaxauthorities)fromanaccountantonorbeforethedateoflingofthecorporateincometaxreturn(forcompanies,onthe
lastdayofNovemberfollowingtherelevantnancialyear).
Thefollowingpenaltieshavebeenprescribed for default in compliance with
theprovisionsoftheTPcode:
Forfailuretomaintainprescribedinformation or documents: 2% of
transactionvalue
Forfailuretofurnishinformationor documents during audit: 2% of
transactionvalue
Foradjustmentstothetaxpayersincome: 100% to 300% of tax on
adjustmentamount
Some important transfer pricing
considerationstokeepinmindwhilenalisingbusinessmodelsaresetoutbelow
A. Franchiseemodel
There are many corporations that prefer to
operate in India through a franchisee modelwherebyathirdpartyinIndiaisgiventhelicence to use the brand or intellectual
propertyandisprovidedvaluableservicesin lieu of payment of a franchisee fee to
theoverseasIPownerorserviceprovider.Money can be repatriated to the franchisorfrom India through two mechanisms:
Theimportpriceofproductsimportedby the franchisee from the franchisor
Thepaymentoffranchiseefees
Theaboveoptionisdenitelyworkableinthe Indian context, but has its own share
ofchallenges.Oneofthembeingtheapplicability of TP on transactions between
franchisorsandfranchisees(whicharerankthirdparties)onthepretextthatthefranchiseehascompletedependence(forcarryingonitsbusiness)ontheintellectualproperty licensed to it by the franchisor and
this dependence may result in the non armslength pricing of transactions.
This challenge can be appropriately
addressed by conducting a robust TP
studytobenchmarktheabovementionedinternational transactions. In fact, such an
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analysis can also be helpful for negotiationsbetween the franchisor and franchisee
regarding appropriate franchisee fees andthe prices of imported products.
B. Distributionmodel
Forsinglebrandretail,MNCscaninvestupto51%tosetupajointventurewith
anIndianpartnerhaving49%stake.TheoverseaspartnermaychoosetosetupthejointventurewithanactiveorpassiveIndianpartnerdependinguponlong-termobjectives.Moneycanberepatriatedtothefranchisor from India through the following
mechanisms:
Importpricesofproductsimportedbythe franchisee from the franchisor
Paymentofroyaltiesfortheuseofbrands or intellectual property
Paymentforservices
AlloftheabovetransactionsaresubjecttoTPandarobustTPstudytobenchmarktheabovementionedinternationaltransactionsis critical to limiting TP exposure. It is
imperativethattaxpayershaveaproactiveapproachtoavoidTPauditissuesatalaterstage.
Indirect tax framework
Presently, there are multiple indirect taxes
eitherleviedbythecentralgovernmentasfederaltaxesorbythestategovernmentsonsales,purchasesormovementsofgoodsintheirrespectivejurisdictions.Typically,anycompany in the Indian retail industry has to
deal with all of these taxes at some point intime during the entire supply chain.
TheConstitutionofIndiaenvisagesthegovernanceofthecountryasafederal structure, comprising the Union
GovernmentattheCentre,andtheStateGovernmentsinthedifferentIndianStates.Under the Indian Constitution, the central
governmentisempoweredtoimposetaxesin the form of excise duty on the production
or manufacture of goods, as well as taxes
ontheprovisionofservices.Thecentralgovernmentcanalsoauthoriseandregulatetheimpositionoftaxesoninter-statesalesor
purchases of goods, although they may beleviedandcollectedbythestates.
Thestatesthemselvesareempoweredtoimposetaxesonintra-statetransactionsconcerning the sales or purchases of goods.The states are also authorised to impose
certain other local taxes such as entry tax.
Finally, local authorities and municipalitiesimpose local taxes.
Inadditiontoalloftheabove,thecentralgovernmentisalsoempoweredtoimposecustoms duties on the import of goods into
the country.
To summarise, the following regulations/indirecttaxesexistinrelationtotheeldofcommodity/servicetaxes,commonlyknowncollectivelyasconsumptiontaxes.
Customsduty:CustomsdutiesorimportdutiesareleviedbythecentralgovernmentundertheCustomsAct,1962(CA)andtheCustomsTariffAct,1975(CTA).ThesedutiesareimposedongoodsimportedintoIndia.At
present,thepeakrateofcustomsdutyis10%.Inaddition,thereisalevyofeducationcess(EC)at2%andseniorandhighereducationcess(SHEC)of1%.Theoverallrateofcustomsduty
with all components of custom duties
(i.e.basiccustomduty,counter-veilingdutyandadditionaldutyofcustoms)isapproximately27%.
CentralValueAddedTax(CENVAT):Atax on the manufacture or productionof goods in India is imposed by the
centralgovernment.Itisalsoreferredtoasexciseduty.Atpresent,thepeakrateofCENVATdutyis10.3%(includingECandSHEC).
Servicetax:Ataxonidentiedservicesrenderedbypersonsdenedinthestatute is imposed by the central
government.Presentrateofservicetaxis10.3%(includingECandSHEC).
CentralSalesTax(CST):Ataxontheinter-statesalesorpurchasesofgoodsiimposedbytheoriginatingstate.Rateof CST in case of transactions between
twoVATregisteredassesseesis2% 1.
StatesValueAddedTax(VAT):Ataxontheintra-statesalesorpurchasesofgoods is imposed by the states. There
aretwomajorslabsofVATrateacrossthe states5% and 12.5% to 15%. In
addition, there are some goods exempt
fromVAT.
Entrytax:Ataxontheentryofgoods
into the state is imposed by the states.
Inaddition,locallevies,suchasoctroior local area taxes, can be imposed bymunicipal or local authorities.
Inviewoftheevolvingnatureofallofthesemultipleindirecttaxes,itisimperativeforcompanies operating in India to not only
understand the present indirect tax regime
inIndiabutalsotokeeppacewithchangesin these areas.
1A rate of 2% is applicable on the fulllment of prescribed conditions.
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GoodsandServicesTax(GST):Ontheanvil
Currently, India has multiple indirect taxes
withvariancesinseveralaspectssuchastaxrates,taxableevents,thetaxablebase,eligible input credits, the point of eligibility
ofinputcredits,etc.Thismakestheindirect
taxregimequitecomplex.Therecontinuesto be a distinction between the taxes on
goodsandthetaxesonservices.Inorderto integrate all of these taxes into a single
uniedtaxsystemandbringaboutbroad-based reforms in the indirect tax regime,
thegovernmentofIndiahasenvisagedtheintroductionofauniformGoodsandServicesTax(GST)acrossthecountry.The date of introduction has not yet been
announced.
AsIndiaisafederalcountry,intherstdiscussionpaperonGSTinIndia,thegovernmentrecommendedadualGST
model,consistingofacentralGST(CGST)tobeleviedbythecentralgovernmentandastateGST(SGST)tobeleviedbythestategovernments.WiththeintroductionofGSTin India, a number of central as well as state
taxeswouldbesubsumedintotheGST.
Basedonthepresentinformation,therateofGSTonservicesislikelytobe16%,comprisingbothCGSTaswellasSGST.Ontheotherhand,therateofGSTongoodsisproposedtobeat20%(10%eachforCGSTandSGST).ThemajorchangeintheproposedGSTregimewillbethatcreditofinputGSTwillbeavailableforbothgoodsandservices.
GSTislikelytobeabigboonfortheretailsectorsinceitwillallowretailerstomakeuse of a seamless credit on all input taxes
andpassonthebenetofthesetaxsavingstoconsumers.Itwillbeawin-winsituationfor both retailers and consumers.
TheproposedGSTisaninexionpointinIndiasscallandscapeandmarksatransitionfromtheexistingorigin-basedtoadestination-basedtaxationregime.TheintroductionofthedualGSTisexpected
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toremovethepresentproblemoftaxcascadingbymovingtoacommontaxbaseandbysubsumingvariouscentralandstatetaxesandleviesintotheCGSTandSGSTrespectively.
OneofthekeychallengesrelatingtotheGSTiswithregardtosupplychains.At
present, the supply chains are impactedbyseveralforces,someintrinsictotheorganisation,somemarket-specicandsomescalinnature.Fiscalconsiderationshavehistoricallybeenakeydeterminantof supply chain structuring in India with
manufacturing bases and distribution
networksengineeredprimarilytoharnessscalbenets.Theavailabilityoftaxexemptions/benetsandtheprevalenceof differential taxes based on geographical
locationshaveinuencedthestructuringof supply chains, procurement patterns and
distributionnetworks.TheproposedGST
willsignicantlyimpactsupplychainsfromprocurement through manufacturing to
distribution.Inessence,GSTpresentsbothchallenges and opportunities in this regard.
The existing indirect tax regime has
severalcharacteristicswhichnegativelyimpact supply chains. These range from
irrecoverabletaxessuchastheCST,complexdocumentationofinter-statemovementof goods, entry barriers at state borders
resulting in long transportation times and
impositionoflocalleviessuchasentrytaxesand octroi upon physical entry of goods intodesignated areas. These characteristics add
to the cost of doing business in India.
GSTmovesawayfromorigin-basedtaxationtoadestination-basedconsumptiontax.This means that all taxation will be based on
whereconsumptionofagoodoraservicetakesplace.Also,thetaxablesuppliesundertheGSTwillextendtoallinter-statemovementofgoods,includingonbranchorconsignment transfers not resulting in a sale
ofgoods.Thishasmajorimplicationsforsupply chains of most companies.
These changes pose challenges for
companies as to how they might engineer
theirsupplychainssoastobeGST-efcient.It is probably fair to suggest that the longerthe supply chain, the more the tax points
intheGSTschemeofthingsandhenceincreased compliance costs. The challengeand opportunity is to thus compress supply
chainsforGSTefciencywhileensuringthatthebusinessobjectivesinandaroundsupply chains are also met. The dual
GSTconsequentlyaffordscompaniessignicantopportunitiesforre-alignmentof procurement, manufacturing anddistribution/sales patterns and to engineer
their supply chains on purely economic
considerationsasopposedtoscalconsiderations.
The time is therefore opportune forcompanies to gear up to face the challenges
andalsotoseizetheopportunitiesthatthe
transition from the present tax system to theGSThasprovided.
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Tax issues faced by retailersoperating in India
We present below some of the common
business issues faced by players in the retail
sector:
A. AcomplextaxstructurewithvaryingVATrates
SinceeachstatehasitsownVATlegislation,itisverydifcultforaretailcompanyoperatingonapan-Indianbasistoconguredifferent tax rates for a product. In addition,
due to different tax rates, companies either
havevaryingmarginsordifferentpricingfor each state. In addition, compliance
requirementsunderthestateVATlegislation are not uniform, adding to the
costofundertakingallcomplianceactivitiesbetween states.
TheVATsystemalsofacesachallengeinkeepingpacewiththevarietyand
complexityofthenumberofjudicialpronouncements passed by the state
governmentandtheSupremeCourt.
B. Withholdingtaximplicationsonmanagement/intercompany charges
Indian companies often enter intoarrangements with their associated
enterprisesoutsideIndiatoavailofcertaincommonsharedorpooledserviceswithinitsgroupsuchasHR,IT,nance,legal,trainingservices,etc.Thepurposeofenteringintosucharrangementsistoachieveeconomiesofscaleandavoidduplication
ofworkforthegroupasawhole.Insucharrangements, each participant bears itsproportionate share of the combined cost
foravailingsuchcommonsharedorpooledservices.Typically,theunderstandingamong independent parties in such cases
isthatthecost-sharingarrangementhasbeenenteredintoformutualbenetandhence,eachparticipantisrequiredtomakea contribution only at actual cost. Thetax authorities generally scrutinise such
transactions to examine the withholdingtax compliance on the payer of charges.
Furthermore, tax authorities also examine
the taxability of these charges in the hands
of recipient.
C. Withholding tax implications of
discountsgiventodistributors
Largegroupsoperatingintheretailsectorgenerally enter into an arrangement with
variousdistributorsforthedistributionoftheir products. The mechanism generallyfollowed is that goods are transferred by
the company to the distributors, who sell
themtothenalconsumer.Attimes,thecompanies offer special discounts to their
distributorstobecompetitiveinthemarketandincreasetheirmarketshare.
Thekeytaxissueunderthesearrangements is whether the discounts
giventodistributorsbythecompaniesisacommissionbynature,andsubjecttowithholdingtaxundertheprovisionsoftheAct.Animportantfactorindetermining
the characterisation of the discountsgiventodistributorsbycompaniesistherelationship between the distributor and
the company, i.e. whether the distributor is
operatingasanagent(anextendedarmofthecompany)orasanindependententityactinginhis/herownindividualcapacity.The terms of arrangement between the
distributor and the company generally
determine the relationship between thetwo. In cases where a relationship of agency
is established between the distributorand the company, Indian tax authorities
generallycharacterisethediscountsgiventodistributorsascommissionsubjecttowithholdingtaxundertheprovisionsoftheAct.Theclassicationofthepaymentstodistributors as a discount or commission
is also important for computing the tax
liabilityrelatingtonon-compliancewiththewithholdingtaxprovisions,leadingtothedisallowalofexpenditure.Also,therecouldbe tax, interest and penalty exposure.
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D. Withholdingtaximplicationsonthedistribution of gifts
In order to promote the business and
increase sales, companies in the retail
sectoroftenprovidetheiragentswithscratch cards, promotional offers or gifts.
Theseagentsinturnprovidescratchcards,
promotionaloffersorgiftstothenalconsumer. What needs to be analysed inthese arrangements is whether liability to
withhold tax arises on the distribution of
gifts, promotional offers or gifts under the
provisionsofAct.
E. Obsolescenceofstock
Typically companies in the retail sector
havetomaintainoptimumstocksofgoodsin order to run their business smoothly and
meetthedemandforproductsinvariousgeographical regions across the country.
Furthermore, the maintenance of optimum
stocklevelsofnishedgoodsissubjecttoqualitystandards.Ifthequalitystandardsare not met for any reason, e.g. the expiry of
shelflifeofnishedgoods,damageofgoodsintransit,etc.,thesenishedgoodsneedtobe destroyed physically and written off. The
taxauthoritieshaveinthepastdisallowedobsoletestockwrittenoffinthebooks,contendingthatobsolescenceofstockisnotan allowable business expenditure or loss.
F. Prepayment of sales tax deferral
VATlawsforvariousstatesprovidefordeferralandpackageschemesofincentives.Under these, an eligible company collects
theapplicableVATfromitscustomersbutpaysittothegovernmentattheendofthedeferral period without interest, as part
ofanincentivescheme.Thustheamountof tax collected by the eligible company
servesasaninterest-freeloanuptotheperiodofdeferment.Thegovernmenthasalso introduced schemes in the past for the
advancepaymentofVATonthebasisofthenetpresentvalueofVATpayableafterthedeferment period. Thus a difference arises
betweentheamountofVATcollectedbythecompanyandtheVATpaidbythecompanytothegovernment.
The tax issue arising on the payment of
thepresentvalueofVATiswhetherthedifferencebetweentheVATpayableafteradefermentperiodandthepresentvalue
ofVATisacapitalreceiptnotsubjecttotax, or whether there is any remission or
cessionoftradingliabilitybyvirtueofwhichthe difference becomes taxable under the
provisionsoftheAct.
G. Taxdeductibilityofadvertisement,marketingandsalespromotionexpenses
Largecompaniesoperatingintheretailsectorincursignicantexpenditureontheadvertisingandmarketingoftheirproductsin order to create awareness among their
potential customers. These expensesare incurred in order to promote sales,
makeproductsmorecompetitiveandtofurtherpenetratethemarket.Companiesgenerally promote their products through
advertisementsinprintortheelectronicmedia, by incurring expenditure on the
sponsorshipofevents,andthroughdisplaymaterials and promotional schemes such as
buy-one-get-one-free,etc.
Thetaxauthoritieshaveintherecentpastdisallowedexpenditureonadvertising,marketingandsalespromotionactivitieson the basis that it is capital expenditure,
andtheyarenotmerelyactsofproviding
information about products, but alsobrand-buildingexercisesofenduringbenettocompanies.Taxauthoritiesalsocontendthattheentireaimofbrand-buildingistosecurealargermarketshareand extract a premium from the customer.
Thereforebyadvertising,companiesarebuilding intangible assets such as goodwill,reputation and credibility, which cannot be
allowedasrevenueexpenditure.
H. CascadingeffectofindirecttaxespaidoninputservicesnotallowedtobesetoffagainsttheVATliabilityarisingfromsales of goods
Companies not engaged in the manufacture
ofexcisablegoodsorprovidingtaxableservicesarenoteligibletooffsetanyinput
servicetax.Thisinputtaxisusuallyasignicantcostforretailcompanies.
I. Customsvaluationsincasesofimportsfrom related parties
Cross-bordertransactionsbetweengroupcompanies are treated as transactionsbetween related parties and closely
scrutinisedbythespecialvaluationbranch(SVB)ofthecustomsdepartmenttodeterminewhetherthevaluedeclaredbythe importer is arms length. The entire
processofdeterminationofvaluesbytheSVBistime-consuming,andduringtheinterim period the importer has to pay extra
dutyonaprovisionalbasis.
J. Continuation of the Central Sales Tax
Underthepresentsystemoflevyingtaxesoninter-statesalesorpurchasesofgoods,the buyer is not eligible to credit inputcentral sales tax charged by the seller in the
originating state. This adds to the cost ofprocurements of the buyer. CST is intended
to be phased out before the introduction of
theGSTregimeinIndia,currentlyexpectedin2012-13.Intheinterim,CSTcontinuestocoexistwithstateVAT.
K. StrictcompliancerequirementsunderstateVATlegislation
TherearevaryingcompliancelevelsundervariousstateVATlegislationsandmostofthesearepaper-driven.Lately,stateshavestartedtomovetowardstheelectronicpaymentoftaxesandlingofreturns.Anydefaultincomplianceresultsinthelevyingof interest and penalties.
Anotherimportantchallengeisthedocumentationrequirementinthecaseofinter-statemovementofgoods.Indiaisalargecountrywith28statesandseven
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unionterritories.ThevariousstateVATlegislationsprescribevarioustypesofdocumentation for bringing goods into the
respectivestates.Complyingwiththeserequirementsisgenerallyachallengeforretail companies. In the absence of complete
documentation,thereareprovisionsforlevyingpenaltiesandthedetentionofgoods.
L. Litigation
Since formal TP legislation was enacted
in India, it has become the single largest
sourceoftaxlitigationforMNCsinIndia.Incidentally, India contributes more than
70%ofglobalTPdisputesattribunallevelandabove.Wehavediscussedbelowacoupleofissuesthathavebeenfrequentlyraised by Indian TP authorities and are
relevantforMNCsengagedintheretailbusiness.
OneofthemajorTPdisputesontransactions between principals and Indiandistributorsistheissueofmarketingintangibles--whoshouldbeartheexpensesandenjoythefruitsofcreatingmarketingintangibles in the country of operation of
thedistributors.Marketingintangiblestypicallyrefertobenetsemanatingfrom selling or distribution functions,
e.g.trademarks,distributionordealershipnetworks,customerlistsandrelationships, etc.
Oneofthekeyconceptshereisthatofthebright line, which is the general threshold
limitofadvertisingandmarketing(A&M)expenses,reectedasapercentageofturnover.Thisiswhatadistributorgenerallyincurs while selling products belonging to
theprincipalmanufacturer.Thetrademarkrelating to the product is legally ownedby the manufacturer and the distributor
obtains a licence to sell the brandedproducts in the designated territory.
TaxadministrationshaveinvestigatedcaseswherethedistributorincursA&Mexpenses,generallyabovetheindustryaverageorbrightline.Theyaskwhetherthe distributor is actually carrying out
signicantadditionalfunctionscomparedto other comparable distributors, and
whethertheyshouldbeexpectedtoreceiveadditional rewards and remuneration,through any of the following:
ReimbursementoftheexcessiveA&Mexpenditure by the principal,being
the legal owner of the brand: In acasewherethesignicantpersonnelfunctionsrelatingtoA&Mactivitiesarecarried out by the principal and the
distributormerelydevelopsthebrandandcreatesthemarketingintangiblesin its territory for and on behalf of theprincipal
Protsplitmechanism:WheresignicantpersonnelfunctionsrelatingtoA&MareperformedbyIndiandistributorsandmarketingintangiblesare created by these distributors ontheir own account. In this case, the
distributor goes out of the realmofbenchmarkingagainstnormaldistributors,havingcontributedsignicantnon-routineintangibles.
The tax administrators concern in such
a situation is understandable, as there
remainopportunitiesforthepassing-onofentrepreneurialprotsrelatedtomarketingintangiblesbythedistributortothe principal, by loading on to the prices
of imported goods and payment of brand
royalties.However,theconceptisbeingappliedbytaxauthoritiesatlowerlevelsina mechanical manner without considering
thefunctions,assetsandriskprolesofthetransactingentities.Atthisstage,severalcases on the issue are pending before the
tribunals and the outcome of this matter is
difculttopredict.
Inordertotacklethisissue,itiscriticalforcompaniestohaveawell-denedTPpolicythat clearly spells out the functions, assets
andriskprolesoftransactingentitiesandhavewell-draftedinter-companyagreements that echo the group TP policy.
AnotherissuefacedbyMNCsisinrelationto the disallowing by the tax authoritiesof royalty or franchisee fee payments. The
taxpayerisrequiredtojustifythepaymentof royalty or franchisee fees, demonstrate
theeconomicbenetrealisedandprovethaservicesreceivedfromoverseasAEsarenotin the nature of shareholder or stewardship
services.Theeconomicbenethastobedemonstrated by submitting documentary
evidenceforallservicesreceived,andtheirutility for the Indian business.
ApartfromaTPanalysisthatbenchmarkspaymentsforservices,itiscriticalfortaxpayers to set up processes to ensure that
documentaryevidencetodemonstrateeconomicbenetisreadilyavailableatthetime of the TP audits. This is critical for
defending payments of royalty or franchiseefees before the tax authorities.
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3The PwC thought leadership report titled
TheRisingElephant-BenetsofModern
Trade to Indian Economyindicates that
liberalising the retail sector will result in
threemajormacro-economicbenets:
#1Reducing wastage
Managing wastage in Indias food supply
cha