India Regulatory Brief: Unified Railway and Union Budget, India’s Complex Retail Landscape, and GST Rules Update

September 26, 2016 Posted by India Briefing Reading Time: 5 minutes

Government Approves Merger of Railways and Union Budgets, Contemplates Advancing Budget Presentation

After a long period of consultation and deliberation among government ministries, key stakeholders, and experts, the Cabinet decided to approve the merger of the railway and union budgets from 2017. This marks the end of a 92 year colonial legacy of presenting the separate railways budget and follows from recommendations by the Niti Ayog, the national policy think tank established under the Modi government. The merger is meant to complement the organizational restructuring recently introduced in the railways ministry by removing it from the deeply political budgetary exercise. Among other benefit, the merger will allow the railways ministry to work under the radar and implement the massive scope of reforms required. Further, the government has clarified that the railways ministry will retain functional autonomy despite its proposals getting amalgamated within the general budget.

In addition to the above discussed merger, the government is contemplating advancing the presentation of the union budget by a month. The move is to enable the speedy implementation of budget proposals to kick-start revenue mobilization and capital expenditure from the beginning of the financial year itself. This will be a big improvement on the current process whereby the budget gets presented end of February, passed in May, and implemented from September-October onwards, despite the financial year starting on April 1. Furthermore, the union budget will no longer use the ‘plan’ and ‘non-plan’ categorization of public spending, given the government’s abolition of the Planning Commission. Instead, spending will be classified in terms of revenue and capital accounts.

Taxi Aggregators, E-commerce Companies Required to Register for GST

The government recently released a 268-page document that details the taxation rules and procedures for various sectors, including for e-commerce and cab aggregator firms, under the impending goods and services tax (GST) regime. Compiled in the form of answers to 500 frequently asked questions (FAQs), the Central Board of Excise and Customs (CBEC) clarified the impact, scope, and structure of the new tax framework.

As per the rules based on the Model GST Laws, cab aggregators like Ola and Uber will have to register under the GST regime and there will be no threshold exemption for them. Similarly, e-commerce firms like Flipkart and Amazon will also need to register under the GST regime. The industry is currently demanding centralized registration and not separately in every state where the company has business. In other clarifications, the CBEC states that a tax evasion of over US$ 375,234 (Rs 2.5 crore) could result in up to five years of jail time with a fine; it would be three years if the amount of tax evaded is between US$ 75,047 to US$ 375,234 (Rs 50 lakh to Rs 2.5 crore), and one year if it is between US$ 37,523 to US$ 75,047 (Rs 25-50 lakh).

RELATED: Goods and Services Tax – A Paradigm Shift in Indian Taxation

India’s Complicated FDI Policy in Retail

India has one of the most complicated regulatory frameworks in the world when it comes to its foreign direct investment (FDI) policy in the retail sector. The country’s retail sector is classified into numerous segments – single-brand, multi-brand, wholesale, and e-commerce, all of which are regulated differently and governed by a separate FDI policy. This has made the system too convoluted, particularly for international investors, and the often stringent entry conditions have impeded foreign interest in the sector.

The introduction of the latest retail segment – food-only retailing – has added to this confusion. The new FDI policy permits 100 percent foreign investment but for only those outlets that exclusively sell locally sourced and produced food items. Moreover, in the single-brand retailer segment, the government has relaxed the 30 percent local sourcing rule for companies offering ‘cutting-edge technology’ or firms who are ‘state-of-the-art’; however, what these terms mean exactly are still uncertain and subject to the government’s case-by-case estimation. Meanwhile, foreign entry in the multi-brand retail segment is virtually impossible as only a few states have agreed to such ventures, and thus, retailers are unable to create a regional supply chain or establish the required back-end infrastructure. More crucially, the current government is reluctant to welcome any new proposals in this segment.

Finally, in the e-commerce segment, the rules announced in March of this year have pushed existing players to re-strategize their operations to comply with the changed regulatory environment. Online marketplace firms (business-to-business) will benefit from 100 percent FDI but none of the sellers on their respective platforms can exceed 25 percent of the firm’s total revenue, prompting these companies to cut sales from their largest sellers. Additionally, marketplace firms cannot influence the pricing and discount on goods sold on their platforms. The new rules have only added to the cost of fierce competition in this segment, which have seen companies completely reorienting themselves, divesting unprofitable operations, or utilizing increased foreign funding.

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