The Budget 2020 had to play a balancing act in addressing the global economic slowdown while restoring hope of a previously promised 5 trillion economy.
The Budget proposals will affect corporates across various sectors, including real estate, retail and infrastructure. In the retail space, legislators must keep pace with evolving models and technologies. 'Franchise' is a popular retail model.
This article discusses proposals that may help franchises keep a tab on changing tax costs.
Casting the TDS Net on E-Commerce
An Indian franchisee fights tooth and nail for a right to retail the franchisor's brand on an e-commerce channel. Franchisors, conscious of this sale channel's popularity, guard it craftily. They would resist sharing this entire pie, perhaps only part with pieces - whether by compensating franchisees for revenues generated from this channel in the franchisee territory or permitting franchisees to earn revenues solely from customer fulfilment services.
When e-commerce was a new phenomenon; corporate and tax laws regulating it was scarce. Now, legislators are getting wise, and rapidly so. The Budget 2020 proposes a 1% tax deducted at source (TDS) on the gross amount paid by an e-commerce operator (eg Amazon, Flipkart, ShopClues) to an Indian e-commerce participant ie an Indian entity that sells goods or services on the operator's platform.
However, this only affects the big fish ie such e-commerce participants who receive more than Rs 5 lac for their goods or services. Also, participants who have not furnished their PAN will be punished with a higher TDS at 5% instead of 1%. The fine print of the Budget clarifies that this would be applicable in both an inventory (ie where customer pays the e-commerce operator) and marketplace model (where the customer pays the e-commerce participant). In the latter, it is not clear who must pay such TDS.
Franchisees that have successfully negotiated the right to retail on e-commerce platforms, must consider this additional cost in their business plan.
Tax on Digital Presence in India – Creating a Level Playing Field for Retailers
The Budget 2020 introduces a tax on non-residents having a 'significant economic presence' in India (SEP). SEP covers engaging with Indian customers through any digital means including downloading data / software in India. These provisions will come into effect only in 2022. In the interim, it is proposed that non-residents be taxed on income from advertisements targeted at Indian customers or from persons who access advertisements though internet protocol address in India (IPA). Similarly, income from sale of data (or sale of goods or services using such data) collected from Indian residents of from a person who uses the IPA.
The Indian retail landscape has always been competitive. Non-resident investors could use mere digital presence to escape taxes and achieve cost-effective sales/promotions/marketing. Indian franchisees would welcome this as a means to achieve a more level playing field.
Shift of DDT from Company to Shareholder – Joint Venture over Pure Play Franchise?
Indian retailers generally toy with a joint venture model (JV) over a franchise model. The former has several advantages over the latter from a franchisee's perspective. These include, first, procuring equity from the franchisor to ensure it has skin in the game and second, granting governance rights to the franchisee over the franchise business. Under the existing Indian tax regime, a JV has always been subject to dividend distribution tax (DDT). With this, a primary concern for a non-resident franchisor shareholder has been the inability to get tax credit for DDT in its home country, thereby lowering its return on investment. The Budget 2020 shifts this tax to shareholders, thereby resolving the credit issue.
This could perhaps steer franchisors toward the JV route.
Increased Customs Duty on Products
Some popular products in the franchise space include footwear, furniture, toys and stationery products. There is a rise in customs duty on such products to boost domestic production.
Franchisees operating in these spaces should factor this into their product purchase costs.
Dispute Payments – Early Payment for Waivers
Franchisees have certain withholding tax (eg on royalty, service fees etc), among other tax obligations in running a franchise in India. Per the Budget, if there is any pending tax appeals; franchisees could explore the proposed dispute resolution scheme. Under this scheme, a taxpayer would be granted full waiver of interest and penalty if the disputed tax amount is paid by 31 March 2020.
If franchisees believe that an eventual tax payment is inevitable under the ongoing dispute, it could consider the scheme as a means to reduce tax costs.
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