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Direct Tax Code and Retail Industry

 Ms. Shishma Kushwaha

  Dr. M.K. Gupta


The new Direct tax code is going to replace the existing income tax act of 1961 in India.
It is expected to be passes in the monsoon session of 2010 and is expected to be enforced
from 1st April 2011. It will completely overhaul the existing tax proposals for not only
individuals but also for corporate houses and foreign residents. Tax rates and slabs
have been modified. It proposes a significant increase in the tax rates and slabs for
persona income tax and the tax deduction limit available on savings from Rs. 1 lakh at
present to Rs. 3 lakh. It has also proposed to reduce the corporate tax rate from 33%
(including surcharge) to 25% which will benefit various sectors in the economy. Retail
industry is also one of the industries which are going to be affected by the new direct tax
code with the change in disposal income with the individual and change in corporate tax.
In the given research paper, researcher has found that the Direct Tax Code will have a
positive impact on the retail industry as it would help the Indian Retail Industry to face
the challenges likewise to get more investment and better infrastructure but at some point
it will be neutral so the net effect will be the positive one for the Indian Retail Industry .

Lecturer, JIMS, New Delhi(Affiliated to Guru Gobind Singh Indraprastha University,

New Delhi) & Ph.D research scholar, Pt. J.L.N. Govt. P.G. College, Department of
Commerce, Faridabad, Haryana, India. (Affiliated to Maharishi Dayanand University,
Rohtak, Haryana, India. E-mail:

Associate Professor in Commerce, P.G. Department of Commerce, Govt. P.G.

College, Faridabad. E-mail:
Direct Tax Code and Retail Industry

Introduction to New Direct Tax code:

The new direct tax code is said to replace the existing Income tax act of 1961 in

India and expected to be passed in the monsoon session of 2010 and is expected to be

enforced from 2011. During the budget 2010 presentation, the finance minister Mr.

Pranab Mukherjee reiterated his commitment to bringing into force the new direct tax

code (DTC) from 1st April 2011.

The new Direct Tax Code will completely overhaul the existing tax proposals for

not only individual tax payers, but for the corporate houses and foreign residents. The

most striking feature is the rationalization level of tax slabs at various levels. The tax

slabs have been liberalized to a great extent.

Highlights of the New Direct Tax Code:

1. The concept of Previous Year has been replaced with Financial Year.

2. Income has been broadly classified into two heads i.e.:

a. Income from Ordinary sources.

i. Income earned as salary

ii. Income from Business or Profession

iii. Income from house property

iv. Capital gains

v. Residual income from miscellaneous sources.

b. Income from Special Sources.

i. Winning from lotteries

ii. Winning from horse race etc.

iii. Specified income of non- resident

3. Any losses arisen due to ordinary sources can be set off or carried forward against

income from Ordinary sources without any time limit. In the same manner, it is

applicable to income from special sources.

4. Earlier, it proposed to remove most of the categories of exempted income

likewise tax exempt status currently available to withdrawals would continue to

apply to amounts accumulated in post-retirement savings schemes like PPF, EPF,

etc, up to March 31, 2011. Money that accrues from April 1, 2011 will be taxed

on withdrawal. But now, these categories have been proposed to be exempted

again as according to the as on 17th May,


5. There is no difference between short term capital gain and long term capital gain.

6. The securities transaction tax (STT) has been abolished.

7. The upper limit on tax savings based investment has been hiked from Rs. 100000

to Rs. 300000.

8. No deduction is allowed on interest payable to banking firms and insurers.

9. Deduction towards interest payment of house loan for self occupied property

would not be allowed in Direct tax code.

10. Deduction for Rent and Maintenance would be reduced from 30% to 20% of the

gross rent.

11. Dividend will continue to be tax free in the hands of the investors.

12. Tax rates and slabs have been modified of which a comparison is given below:

Income- tax rate Income tax slab for Men Income tax slab for Men

(FY 2010-2011) in Rs. (FY 2011-2012) in Rs.

No Tax 0-160,000 0-200000

10% 160,000- 500,000 200,000-500,000

20% 500,000 – 800,000 500,000- 1000,000

30% 800,000 & Above 1000,000 & Above

Indian Retail Industry

The Indian retail industry is the fifth largest in the world. Comprising of organized and

unorganized sectors, India retail industry is one of the fastest growing industries in India,

especially over the last few years. Though initially, the retail industry in India was mostly

unorganized, however with the change of tastes and preferences of the consumers, the

industry is getting more popular these days and getting organized as well. With growing

market demand, the industry is expected to grow at a pace of 25-30% annually. The India

retail industry is expected to grow from Rs. 35,000 crore in 2004-05 to Rs. 109,000 crore

by the year 2010.

Indian Retail Industry after recession:

With the economy now on the revival path, organized shopping centers and malls have

considerably increased retail presence in Key Urban Towns and the Rest of Urban India,

a report has said.

The Ernst and Young report said that the percentage of growth in the number of malls in

Key Urban Towns were more than double, at 55 per cent, than that of metros, which

stood at 24 per cent, over the last two years.

The report, titled ‘The New Market Sheers: Tapping Potential Beyond the Metros’,

identified the trends in consumption patterns and marketing spends in small-town India.

Consumers in Key Urban Towns show an increasing preference for premium products

and services of established mass brands. The sale of consumer goods like LCD TVs is

also on the rise in Key Urban Towns, given the significant uptake in leisure and lifestyle

spends of consumers there, it said.

The report said that men were utilizing wellness services now, more than ever before, not

just in the big metros but also in tier II and III cities.

Women in small towns are more willing to pay large sums of money for procedures

pertaining to age correction, body sculpting and removal of skin imperfections, etc, it


Ashok Rajgopal, Ernst & Young, Partner, Media and Entertainment Practice, said, “We

are witnessing enormous opportunities in non-metro urban markets, which were only

marginally affected by the recession and now have enhanced purchasing power.”

The report said that the share of Key Urban Towns and Rest of Urban India in newspaper

advertising (by volume of activity) in 2009 was higher than 50 per cent across most


The report said that while metros and Key Urban Towns were driving the growth in later-

stage consumption (higher transaction value products and discretionary goods), Rest of

Urban India was the force behind early-stage consumption (necessities and products with

lower transaction value).

This trend is likely to continue with the changing consumption pattern of consumers,

fuelled by greater purchasing power, the report said.

Growth of Indian Retail

According to the 8th Annual Global Retail Development Index (GRDI) of AT

Kearney, India retail industry is the most promising emerging market for investment. In

2007, the retail trade in India had a share of 8-10% in the GDP (Gross Domestic Product)

of the country. In 2009, it rose to 12%. It is also expected to reach 22% by 2010.

According to a report by North bride Capita, the India retail industry is expected

to grow to US$ 700 billion by 2010. By the same time, the organized sector will be 20%

of the total market share. It can be mentioned here that, the share of organized sector in

2007 was 7.5% of the total retail market.

Challenges faced by Indian retail industry

• The tax structure in India favors small retail business

• Lack of adequate infrastructure facilities

• High cost of real estate

• Dissimilarity in consumer groups

• Restrictions in Foreign Direct Investment

• Shortage of retail study options

• Shortage of trained manpower

• Low retail management skill

The Future

The retail industry in India is currently growing at a great pace and is expected to

go up to US$ 833 billion by the year 2013. It is further expected to reach US$ 1.3 trillion

by the year 2018 at a CAGR of 10%. As the country has got a high growth rates, the

consumer spending has also gone up and is also expected to go up further in the future. In

the last four year, the consumer spending in India climbed up to 75%. As a result, the

India retail industry is expected to grow further in the future days. By the year 2013, the

organized sector is also expected to grow at a CAGR of 40%.

With the passage of time, national income has risen from US $754,849.44million

in 2006 to US $ 1096220.76million which leads to increase in disposable income of the

consumers which has risen from US $ 733,601.07 million to US $1051931.97 million.

Impact of direct tax code on Indian Retail Industry

The impact of Direct Tax Code (DTC) on the retail industry will be:

• Direct impact

• Indirect impact

Direct impact of Direct Tax Code on the Indian Retail Industry:

• Corporation tax has been reduced to 25% which was earlier 33%, it will result in

the increase in after tax profits available with the industry. With the increase in

more profits, industry will have more investment prospects resulting in the growth

of the industry. Due to reduction in the corporate tax, the net impact on after

tax profit will be of 12% (approx).

• More profits after tax will results in the either in investment or in the distribution

of more dividends to investor. More investment into new project directly leads

to the growth of industry and economy as well whereas distribution of increased

dividends will have indirect impact in the growth of economy as it will result in

more demand leading to increase in supply and more employment.

• Basis for computing Minimum Alternate Tax (MAT) has been changed from

“Book profits” to “Gross Assets”.

Gross Assets = Value of Gross Fixed Assets + Capital work – in – progress +

Book value of all other assets – Accumulated Depreciation – debit balance in

P&L A/c.

It will be 2% of gross assets and will be final tax and will not be available as tax

credit in subsequent years.

Earlier to it, it was 18% on the book profits of the organization.

Now, it will lead to more efficient and effective utilization all the resources

(assets) available to the organization.

Indirect impact of Direct Tax Code on Indian Retail Industry

• Direct Tax Code is supposed to increase the tax slabs as given at above in the

given research paper, resulting the people to pay less tax which leads to increase

in their disposable income. With the increased disposable income, people will

demand more products which will have a positive impact on the FMCG industry

and indirectly to the Indian retail industry too.

• With the reduction in tax rates, people will save more as

Y= C + S (I)


Y = Income

C = Consumption

S = Saving

I = Investment

We assume that total income earned, will be either consumed or saved and

all the savings will be invested in the economy. With the increase in investment,

more investment will be also be made in the retail industry.

Direct Tax Code to Face the Challenges of Indian Retail Industry

1. Corporate tax has been reduced to 25% from 33% to provide the tax benefit to

large Indian Retail Houses too.

2. With the increase in savings and more investment in various sectors, it will also

lead to investment in infrastructure industry. More investment in infrastructure

industry may also provide adequate infrastructure to the retail industry for the

proper functioning.

3. Direct Tax Code has tried to reduce the dissimilarity in consumer group by

charging low taxes from low income group and providing more deductions on

savings and high taxes on high income group.

4. Direct Tax Code has no impact on the FDI in retail, so it will be neutral about the

impact on FDI.

5. Direct Tax code will be neutral for the more retail study options as it is not going

to support any retail study with the change in taxation.

6. It will also be neutral about providing the skilled and trained management skill to

the retail industry.


At last, we can say that Direct Tax Code (DTC), will have a positive impact on the Indian

retail industry as it increases the demand for the products of the industry by increasing

the after tax income of the individual. It also increases the opportunity for the investment

as the residual profits with the industry increases with the reduction in various tax rates

like wise reduction in the corporate tax, wealth tax and STT and more investments will

also be there with the increase in savings of the individuals. Direct Tax Code will help

the Indian retail Industry but it will not entertain the retail industry to face the all

challenges faced by Indian Retail Industry.












Authored by:

 Ms. Shishma Kushwaha (lecturer, JIMS, New Delhi(Affiliated to Guru Gobind

Singh Indraprastha University, New Delhi) & Ph.D research scholar, Pt. J.L.N.

Govt. P.G. College, Department of Commerce, Faridabad, Haryana, India.

(Affiliated to Maharishi Dayanand University, Rohtak, Haryana, India)

 Dr. M.K. Gupta (Associate Professor, Pt. J.L.N. Govt. PG college, Faridabad,

Haryana, India)