pwc winning in india retail sector 1

7/31/2019 Pwc Winning in India Retail Sector 1

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Winning inIndias retailsectorFactors for success

www.pwc.com/india


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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



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



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



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.



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



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



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


18/608 PwC

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.



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


20/600 PwC

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



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


22/602 PwC

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.


23/60


24/604 PwC

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:



- 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


26/606 PwC

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.



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


28/608 PwC

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.



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.


30/600 PwC

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



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.


32/602 PwC

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

chainisimperative.

Empiricalstudiesinemergingmarketeconomieshaveshownthatthegrowthoforganised retail results in the following:

Technologytransfertoreducewastagein the food supply chain

Improvementstothequalityofproduceavailableinlocalmarketssinceitcreates local distribution channels for

produce

Benetstolocaleconomysincelocalsuppliers are engaged in it

Morecompetitivelypricedproductsforall consumers

Fresherproducewithhigherlevelsofhygieneandquality

Producewithalongershelf-life

Likeotherdevelopingeconomies,Indiassupplychainisfairlyone-dimensionalandthereisverylittlevalue-addedactivity,since distribution remains fragmented and

unorganised. India is a fragmented country

with70%ofthepopulationresidinginruralareas. The ability to reach consumers and

transportgoodstothemischallenginggiventhe absence of robust infrastructure and

logistics.Duetothepresenceoflargelocaland multinational companies, India has a

well-developednon-foodmanufacturingsupply chain.

Oneoftheargumentsinfavourofforeigndirectinvestment(FDI)isthatitwillusherintechnologiesandexpertiserequiredto build robust food supply chains. In

the Indian food chain, from farm to

Moderntradebenetsseveralstakeholdersand

helps create a more robust retail ecosystem

Liberalising the Indianretail sector benetsmultiple stakeholders.

fridge,distributioninvolvesmultipleintermediaries and wastage during

transportation and storage. The current

foodsupplychainsituationinIndiaisweak:

Existingintermediariescausedelaysand eat up a large portion of theearnings that essentially belong to the

farmer, resulting in a chain replete withinefciencies.

Increasedwastagelevelsarebetween24 and 40%.

Severalsmallstakeholders(farmers,wholesalers, food manufacturers,

retailers)workinsilos.

Alargeportionoffruitsandvegetablesarelostduetoinadequatepost-harvesthandling, cold storage, processing

facilitiesandconvenientmarketingchannels.

Hugequantitiesofgrainsarewastedbecause of improper handling and

storage, pest infestation and poor

logistics management.

Indias food supply chain is among the least

developedintheworld.Itisachallengetounlockoperationalefciencies,facilitategrowth,reducecostsandimprovethetimeittakesforfoodtomovefromthepointofmanufacture to the point of consumption.

Tosolvetheseissues,robustandscalablesupply chains need to be built and the

governmentneedstomakeappropriatelegislativechangestocatalysethistransition

in the food supply chain.



#2Employment

RetailcanboostemploymentinIndia.

Modern trade emerged in the 1990s and is a

relativelynewsectorinIndia.GivenIndias

attractivenessasaretaildestination,foreignbrands,ifnotalreadyhere,plantoarrivesoon. In addition to global retailers, Indian

incumbentshaveaggressiveexpansionplansintermsofgrowingtheirstorenetworks,launching new formats, entering Tier II and

Tier III cities, etc. To staff their operations,

retailerswillhiremillionsforfront-andback-ofcefunctions.Retailersarealsoinvestingintrainingandcreatingcaptivetrainingacademies.Othersarepartnering

with local business schools to create retail

certicationcourses,wherestudentsareabsorbed into retailers operations after

graduation.FDIinretailwillgenerateemploymentsince new entrants will need to hire staff

foroperations.Mostindividualscurrentlyemployed by unorganised retail players do

notreceivehealthcare,educationalorotherbenets.Onceindividualsareabsorbedinretailer operations, they can access more

equitablewagesandbenets.Theeffectof modern trade will be most apparent at

the bottom of the population pyramid, as it

willunleashopportunitiessuchasnon-agricultural employment for rural youth

andbetterqualityoflivingfortheexistingagriculturalsociety.Retailcanbeanenablerfortheunemployedinurban,semi-urbanand rural India.

#3Sourcing

RetailcanstrengthenIndiaspositionasasourcing hub to the world.

Globalretailershavealreadybeensourcingproducts from India. Their presence in

theIndianmarketwillenhanceexports

fromIndia,astheydevelopandleveragerelationships with local suppliers. The

extent of sourcing from India will increase

when global retailers are allowed to

operateintheIndianmarket.PwC

pwc winning in india retail sector 1

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