Retail Dude

Dear Readers,

A set of three new rule books for businesses in the country is going to transform and affect a company’s operations. Welcome GST, IFRS and DTC!

GST (The Goods and Service Tax) will be the one whole sole tax that the Government has proposed that will swallow all other indirect taxes that we end up paying. GST will treat as one market in terms of taxation and thereby only a single rate for products. Currently companies pay the central excise duties, the VAT imposed by the State Govt. Not to mention there are entry taxes and interstate taxes that is burdened upon. The proposed date of application of the GST is April 1^st 2010, although it’s almost ready to be postponed for sure as the Centre has a huge task of bringing all the States to the same page. Not to mention that the companies have a hefty back end work that will be needed to complete, this means aligning business documentation, supplier relationships, distribution, compensation policies, loan agreements to name a few. The benefits are major as the GST (proposed to be around 16% - 18%) will significantly reduce the total combined taxes (currently around 35%-40%) that are prevalent today to any sale of product or service provided. Talking about impacts, the first to flash is lowering of prices, this will increase demands. A single price for any product or service across the country which gives consumers a great relief. Talking of benefits to organizations, having regional warehouses instead of having one in every state impacts supply chain costs and capital investments. You will see a real application of the ‘hub and spoke’ model where a single warehouse caters to a lot many states at retail too. A significant change will be lower capital required to match the same level of production owing to consolidating the excise duty in GST.

IFRS (International Financial Reporting Standards) is a new basis of accounting that is more transparent being followed globally. About 100 countries have adopted it, which then makes comparison of statements across companies much easier. This will eventually replace the Indian GAAP structure. Again the adoption date is effective April 1^st 2010. Companies listed and unlisted will now have to consolidate their accounts, not just subsidiaries but associate and vendors they control (GAAP defines it as total control, but IFRS states that it could be partial control or directing activities too) . “Fair Value” accounting is to be adopted where all transaction or entry will be reflected in the current market value. This also means reporting for intangible assets like, manpower, copyrights, brands, patents, customer base etc, therefore a constant evaluation of assets take place. This will result in a wide variance in income and profits as companies will not be able to dump their losses into subsidiaries and associates. It is sure to have a big impact on FMCG, Pharmaceutical and the Automobile industries where a lot of vendors are implied. It’s sure to change a way of business in India.

DTC or the Direct Tax Code is a proposal to take an effect 2011. Under this regime the proposal is to cut the corporate profit tax from 34% to 25% all inclusive including surcharge and cess. The change in MAT (Minimum Alternate Tax) from the current 15% of booked profits to 2% on the gross assets for non banking firms. This simply means a loss making venture also can’t avoid this tax, but the losses can be carried forward too! These rules will even the playing field. Economics and not incentives will decide locations of new units. Tax holidays and Special Industry, what’s that? Location based incentives will be a passé. Special industrial zone status like (Baddi in HP) where a lot many FMCG and Pharma Co’s have their setup without much competitive advantage or Export oriented incentives/ SEZ’s or Software Parks / Infrastructure companies ( Sec 80-1A) rebates that they all enjoyed so far will be flushed out. However 9 businesses have been exempted like oil and gas, SEZ developers, power, cold chain, warehousing, hospitals (in select areas), fruits and vegetables, oil pipelines and infrastructure, as they are considered high risk developments. Although the incentive will on the amount invest and not where they invest.

Overall, the new regime if implemented on the deadlines will affect the way corporate houses do business and in the right way. There will be much more accountability and will be a change in which companies measure its customers. Pushing towards mere financial gains will come hard by. A better collaboration of industries will soon happen and therefore a better consolidation. The customers are sure to laugh their way back home.

Cheers to One India!

Sudip

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