Consumer marketsPost-budget sectoral point of view

Union Budget 2015Inspiring confidence,

empowering change in India

Table of contents

1. Context

2. Key policies/fiscal and tax proposals

3. Unfinished agenda

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Context

Where are we Being an economy that is largely driven by domestic consumption, India’s growth is reflected in the progress of sectors such as, agriculture, FMCG and retail. The agricultural sector specifically plays a vital role, contributing 18 per cent to India's GDP, providing employment to about 50 per cent of the country's workforce and feeding the world’s second most populous country1. As a result, India has emerged as one of the world’s leading producer and exporter of food products over the past few years.

Despite this, the journey of food from a ‘farm to fork’ is arduous in India, affected due to low processing capacities, large number of intermediaries, post-harvest wastage and persistent food inflation. The agri and allied sectors grew at a CAGR of 3.6 per cent during the eleventh Five year Plan, lower than the targetted, four per cent.

Over the last few months, government initiatives such as ‘Make in India’ and ‘roll out of GST’ stimulated investor sentiment. In retail (which is one of the fastest growing sectors in India), e-commerce hogged the limelight throughout the year gone by, capitalising on the ever-rising internet users in India. However, uncertainties around the introduction of the FDI policy in retail continues to persist. As a result, many international retailers have put their India entry/expansion plans on hold.

Key issues/challenges• Growing fragmentation and shrinking land holdings have severely impacted agricultural productivity,

efficiency and modernisation

• High reliance on monsoons for irrigation, low processing capacity, poor post harvest infrastructure leading to high food wastage (up to 25-30 per cent for selected fruits and vegetables), lack of adequate market infrastructure to enable proper price discovery and realisation

• Dearth of adequate logistics infrastructure for the ‘farm to fork’ food value chain; including procurement, processing, storage and distribution

• Recently, contribution from co-operative banks which are more intrinsically connected to the farmer, have been going down. Commercial banks have fallen short of RBI credit targets for rural lending

• Stringent sourcing and investment norms in single and multi-brand retail for investments by international retailers.

What was expectedThere was a need for ‘strategic’ and ‘long-term’ initiatives to overhaul inefficiencies and bring sustainable growth for the consumer sector in India. Key industry expectations were as follows:

• Speedy implementation of GST and tax incentives for ‘Make in India’ and ‘Digital India’ initiatives

• Policy measures for creation of an efficient supply chain infrastructure and logistics for FMCG and Agri Sector companies, enabling fewer and larger stock points across the country

• Removal of the anomaly in the inverted duty structure and reduction in customs and excise duty rates of raw materials for the benefit of manufacturing in India

• Expedite the move towards achieving a more stable transfer pricing regime

• Clarity on transfer pricing adjustment on advertisement, brand promotion expenditure and express provision for deductibility of royalty pay-outs by Indian companies to its overseas parent for ‘brand use’

• Abatement of levy of service tax on renting of immovable property, since such a tax becomes a cost to the retailers (which majorly contributes to the increasing prices of essential goods/commodities and the increase in inflation)

• Clear and definite FDI policies in retail to help investors finalise their strategy of investing in India.

1. ‘Indian Agriculture Industry report’, IBEF, February 2015

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Key policies/fiscal and tax proposals

Key announcementsNon-tax• The government plans to allocate INR530 billion to support micro-irrigation, watershed development

and Agriculture Ministry’s organic farming scheme: Pradhan Mantri Krishi Sinchai Yojana• To boost agriculture credit, the government proposes to allocate INR250 billion to the Rural

Infrastructure Development Fund (RIDF). To further complement this, the government has also allocated INR347 billion to the Mahatma Gandhi National Rural Employment Guarantee ACT (MGNERAGA) for FY2015-16

• A credit target of INR8.5 trillion for banks has also been set by the government, while also announcing measures to improve credit availability to landless farmers

• The government also plans to create a National Agriculture Market for the benefit of farmers, which is likely to have an incidental benefit of controlling price rise

• Allocation of INR15 billion towards the National Skill Development initiative and a plan to set up a post graduate institute of Horticulture Research and Education in Amritsar.

Tax • Implementation of Goods and Services Tax (GST) is ascertained for April 2016• Increase in effective service tax rate to 14 per cent (from 12.36 per cent) would lead to increase in

retail cost for industry players involved in trading of goods• Excise duty on cigarettes increased by 25 per cent for cigarettes of length not exceeding 65 mm and

by 15 per cent for cigarettes of other lengths • Excise duty on footwear having a retail price of above INR1000 per pair has been reduced by six per

cent. This reduction could make footwear cheaper in the hands of consumers and boost consumption

• Increase in excise rate to 12.5 per cent with education cesses being subsumed• Due to an increase in the general rate of excise duty, effective customs duty rate has marginally

increased from 25.85 to 26.43 per cent for capital goods and 28.85 to 29.44 per cent for other goods• Time limit for availing CENVAT credit on inputs and input services increased from six months to one

year• Tax rates for royalty (including brand royalty) and fee for technical services under the Indian Income

Tax Act has been reduced from 25 to 10 per cent. Most of the tax treaties entered into by the Indian government provides for tax rates between 10 to 20 per cent

• In case of indirect transfers, it has been clarified that offshore transactions shall be taxable in India only in case the value of Indian assets exceeds INR10 crore and the same represents at least 50 per cent of the value of total assets of a foreign company. Further, Indian companies are now required to report all transactions that lead to change in its ownership structure or control

• Threshold limit for compliance with specified domestic transfer pricing transactions enhanced from INR5 crore to INR20 crore.

ImpactAnnouncement on the Goods and Services tax (GST) would be a significant development for the sector if implemented in a timely and effective manner. It is expected to streamline the Indian taxation system and reduce the cascading effect on the cost of goods and services.The Soil Health Card Scheme and thrust on organic farming is a positive step by the government to address issues of soil fatigue and low productivity, due to indiscriminate usage of fertilisers. Fund allocation to micro irrigation and watershed development, and launch of the Pradhan Mantra Krishi Sinchai Yojana could go a long way in arresting the decline in agricultural productivity.

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The increased annual allocation to the Rural Infrastructure Development Fund (RIDF) signals a desire to improve rural infrastructure such as roads, processing facilities, storage, etc., and to enable greater access to the much-needed credit to farming communities.

The creation of a unified market would enable accurate price discovery and better aggregation of farm produce. This in turn is likely to help the farmers realise better prices for their produce and will also curb artificial inflation by curtailing the influence of intermediaries that operate at every level.

In terms of the likely impact of the changes in taxation, entities involved in trading of goods could witness a rise in cost due to a hike in the service tax rate. Industries such as electronics and fertilisers, etc. are likely to gain with a series of cuts in customs and excise duties on raw material inputs. Reduction in custom duties on certain raw materials are a part of the government’s initiative to promote domestic manufacturing and creation of more jobs under the ‘Make in India’ initiative.

SummaryOverall, the Union Budget 2015–16 envisages a sincere effort of the government to provide a balanced and long-term social and economic growth for India. The positive consumer sentiments and softening inflation, budget announcements on GST, revision of excise/custom duty structure, fund allocations for skill development and rural markets development could help ensure long-term growth for the Indian consumer sector.

The timely and honest implementation of announced reforms and initiatives would help to deal with the inherent industry challenges on one hand, and to ensure long-term capacities creation on the other.

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Unfinished agenda

What remains While the budget lays down some welcome policy measures, certain challenges such as shrinking land holdings and poor post-harvest infrastructure leading to high food wastages, remain unaddressed.

Allied industries, including logistics, storage and food processing are in need of greater financial stimulus from the government. In addition, a more structured and incentivised expansion of food parks and SEZs could help to boost the food value chain efficiency.

Retail, one of the fastest growing sectors in India, is demanding to be recognised as an ‘industry’, a National Policy for Retail and International Trade, remain untouched. There is also no mention of a FDI policy in retail.

What is expected going forwardWhile the Union Budget 2015–16 envisages a balanced and long-term economic and industrial growth for the consumer sector, the real benefits would only accrue if these are implemented in a timely and efficient manner. State governments also need to ensure high involvement in all central government initiatives to determine fast track and effective implementation.

To further boost agricultural productivity, more focus is required on infrastructure development, farm machinery and technology advancements. Focussed attention on FMCG, consumer durables and retail sector in general, is required under government initiatives such as ‘Make in India’ and ‘Digital India’. Investments in research and training should be growth enabling requisites to enhance availability of skilled labour in manufacturing and retailing industries.

A more liberal and clearer FDI policy with no differentiation in single and multi-brand retailing could boost foreign investments in the sector.

The information contained herein is of a general nature and is not intended to address the circumstances

of any particular individual or entity. Although we endeavour to provide accurate and timely information,

there can be no guarantee that such information is accurate as of the date it is received or that it will

continue to be accurate in the future. No one should act on such information without appropriate

professional advice after a thorough examination of the particular situation.

© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All

rights reserved.

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KPMG in India contacts:

Nitin Atroley

Partner and Head

Sales and Markets

T: +91 124 307 4887

E: nitinatroley@kpmg.com

Rajat Wahi

Partner and Head

Consumer Markets

T: +91 124 307 5052

E: rajatwahi@kpmg.com

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