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BACKGROUND: THE GROWTH OF FASHION INDUSTRY IN INDIA
India is the second largest producer of textiles and garments in the world. The abundance of raw materials such as cotton, wool, silk and jute, coupled with the skilled workforce have made the fashion industry in India witness a paradigm shift and an unprecedented robust growth. The textile industry accounts for 14% of industrial production, which is 4% of India’s Gross Domestic Product (GDP), and employs nearly 45 million people and accounts for a 12% share of the country’s total exports.1 The potential size of the Indian textiles and apparel industry is expected to reach USD 223 billion by 2021.2
The burgeoning purchasing power of the Indian customer and his ever evolving fashion palate (partly attributable to his global exposure through travel and media) coupled with the relaxation of Indian government's policies on foreign investment in retail have given the fashion moguls of the world the much required impetus to set up shop in India. The Indian film industry and "Bollywood" in particular has been the evergreen mascot for promoting Indian fashion wear and designers both on and off screen. Millions of Bollywood fans in India act as a target audience for the latest trendsetting attire worn by their favorite stars in theatres and on television. Participation of Indian designers in renowned fashion events abroad with the likes of the Paris & Milan Fashion Week has established India as a trendsetter to reckon with on the map of the fashion industry. India has now become an important fashion destination and is featured as a part of the business plans of many global fashion houses and apparel companies.
The fashion industry is split into five major categories:
- “Premier fashion” houses such as Chanel, Hermes, YSL and Lanvin focus more on couture and largely cater to a celebrity clientele by keeping their production limited in numbers.
- The "luxury segment" such as Burberry, Diane Von Furstenberg and Stella McCartney serve an affluent section of society that has achieved a degree of success or recently accumulated wealth – often referred to as the "noveau riche". They perceive themselves as the upper crust but are not royalty or public figures.
- A "luxury segment" can have a luminary following, while premier couture brands are less inclusive in their approach.
- The "Affordable luxury" segment targets ambitious, price sensitive consumers who aspire to buy quality at reasonable figures. They tend to budget their expenditures and are unlikely to make impulsive purchases.
- "Main stream brands" thrive on a mass appeal while the "discount brand segment" is geared towards low income consumers or those belonging to the bottom of the pyramid.
IMPORTANT TRENDS IN THE INDUSTRY
Fervent protection of Intellectual Property Rights
The tremendous growth and the huge revenue potential of the fashion industry have made designers and fashion houses realize the importance of protecting their rights in the designs they create, both on and off the ramp.
The fashion industry is taking keen interest in educating themselves about their intellectual property rights. A proactive registration of the works to secure better protection of their rights is the order of the day. These fashion houses and designers have also resorted to taking strong actions against people who infringe upon their original creative works. Some examples include those of popular designers like Tarun Tahiliani and Suneet Verma who have, in the recent past, dragged the infringers of their design to the courts and sought protection of their intellectual property rights. These trends signify that the industry players are conscious of their rights and are willing to pursue actions against the infringers who violate them.
Popular business models adopted by foreign players
Historically, foreign players have typically entered the Indian market through the franchise model or via joint ventures arrangements.
- Joint Venture Route: Under the joint venture route, a foreign entity enters into a joint venture agreement with an Indian entity and carries out retail trading through the resulting joint venture. For example, Future Ventures India Ltd and Clarks Future Footwear Ltd, UK formed a joint venture. Other international brands such as Gruppo Coin, Celio, Diesel, Nautica, Marks and Spencer etc. have also adopted this model. Target specific ventures such as Mothercare, UK and DLF Brands joined hands for venturing into maternity garments, baby clothes and equipment segment. A case of a recent large scale joint venture involves DuPoint, Reliance Industries and Vipul Sarees joining together to launch an exclusive collection of eco-friendly sarees.3
- Franchise Route: The other popular model is the franchise structure where an established international fashion brand, i.e. franchisor, enters into a franchise agreement for the Indian territory with an Indian partner, the franchisee for selling and/or distributing the products of the franchisor. Under this franchise model the franchisor permits the use of its brand, trademark and technology and know-how by the franchisee for a fee in the form of franchise fee or royalty payment. In India this mode is used by certain International brands such as Swatch, Versace, Aldo, Gucci etc. There are various sub models under this model itself, being the master franchise structure where the master franchisee to sub-franchise the rights to local franchisees for carrying out sales and/or distributions. Another model is where the franchisor directly enters into franchise agreement with various local franchisees in different areas. There are no specific laws governing franchise agreements in India.
The virtual shopping mall
While the idea of e-commerce has been around for more than a decade, the convenience of shopping at the tips of your fingers has recently caught the fancy of the Indian consumers. In the past few years, online shopping portals have grabbed the fancy and attention of all types of consumers. Click and shop is the mantra of today's educated customer. E-retail in both its forms – online retail and marketplace is the fastest growing segment, increasing its share from 10% in 2009 to an estimated 18% in 2013. The size of the e-retail industry in India is poised to be between USD 10-20 billion by 2017-2020.4
By eliminating the need of physical structures and heavy rents, these "virtual shopping malls" have proven to be a more economical and preferred option for various fashion retailers who do not have to worry about stocking risks at all. It is estimated that the total spend on warehousing and sortation centres could be as high as 3%-6% of top-line revenues – representing USD 450-900 million of spending on warehousing till 2017-2020. The industry is expected to spend an additional USD 500 – 1000 million in the same period on logistics functions, leading to a cumulative spend of USD 950-1900 million till 2017-2020.5 Various fashion brands have also jumped on to this popular band-wagon for showcasing their wares. These e-retailers provide facilities such as home delivery, returns, cash on delivery, thus luring customers to make online purchases without physically examining the product. Global and local e-commerce retailers like Fashionandyou, Myntra, Flipkart, Jabong, Snapdeal and Amazon have launched websites that offer Indian consumers a wide range of products such as apparel and accessories apart from other lifestyle products. Such e-commerce websites have taken a step further by launching mobile applications where customers may view, select and purchase products at their fingertips on the go.
Impact of shift from custom work by tailors to ready-to-wear:
Over the last several years, the consumers' preferences of apparel purchases have shifted from custom work by tailors to ready-to-wear. The need for convenience, quality and reduced waiting period to receive a finished garment has fuelled an increase in demands and production for "ready to wear" products. Due to this, local artisans and self-employed workers are being increasingly displaced by wageworkers, which threatens local techniques and skills.
MAJOR PLAYERS IN INDIA
Noteworthy Foreign Players & Foreign Brands - Zara, Mango, Marks & Spencer, Charles & Keith, Hush Puppies, Diesel, Nautica, etc.
Noteworthy Indian Players - Provogue, Wills Lifestyle, Reliance Footprint, Woodland
Noteworthy Indian Designers of international repute - Ritu Kumar, Ritu Beri, Manish Malhotra, Tarun Tahiliani, JJ Valaya, Rohit Bal, Abu Jani and Sandeep Khosla, Wendell Rodricks, Neeta Lulla and Reena Dhaka
Following the global trends, proactive efforts have been taken by industry bodies such as Fashion Foundation of India (FFI) representing the leading designers taking up IP infringement issues and other issues affecting the industry. These industry bodies are not only concentrating on the protection of IPRs, but are also involved in research through its Research and Analysis cell to provide various aspects of fashion industry. Additionally, FFI is also setting up a legal cell to assist the design houses in the matters relating to IPR, licensing, arbitration etc. Some of the other noteworthy industry organizations are Fashion Design Council of India ("FDCI") and Apparels Export Promotion Council ("APEC").
12TH FIVE YEAR PLAN
The main objectives of the 12th Five Year Plan 2012-17 (“12 FYP”) are as follows:
- Achieve an annual average growth rate of 11.5% in volume terms in cloth production and 15% in value of exports by increasing domestic value addition and technological ‘depth’ and by enhancing the global competitiveness.
- Expected that training to 35 lakh persons would be provided.
- Additional employment to the tune of 15.81 million by 2016–2017 would be created.
Infrastructure: The Scheme for Integrated Textile Parks (SITP), launched in 2005 to neutralize the non-availability of quality infrastructure, has seen only 9 projects completed out of 40. Under the 12 FYP there is an objective of setting up Integrated Apparel Clusters (IAC), as activities laid down in the Technology Mission for Knitwear and Wovenwear would be subsumed in SITP.
Jute: One of the major focuses of the 12 FYP is to “implement regulatory framework in specified areas, encouraging indigenous production of specialty fibres and yarns, encouraging investment in high end technical textiles products, including FDI, encouraging R&D in technical textiles, formulation and notifications of standards by BIS and ensuring availability of data base.”
Silk: With an objective to achieve the targeted silk production,6 efforts would be made in R&D, technology transfer and enterprise development, creating an inbuilt pyramid structure of federated farmers and farmer associations to synergise and synchronise the production processes.
Wool and Woollens Textiles: The woollen industry in India is broadly divided and scattered between the organized and decentralised sectors. During the period 2009–10 and 2014–15, exports of woollen yarn fabrics and made-ups are expected to record a CAGR of 11.6%. A proper database and action plan is aimed to be introduced to reduce the mortality of sheep, increase coverage of sheep insurance and improving the productivity in wool production.7
Some of the major points to be noted from the Budget 2014-15 (“Budget”) are as follows:
- As against this, cut and polished diamonds and coloured gemstones attract basic customs duty of 2 percent. Basic customs duty on semi-processed, half cut or broken diamonds, cut and polished diamonds and coloured gemstones has proposed to be rationalized at 2.5 percent.
- Gold import duty proposed to remain at 10%.
- Duty free entitlement for import of trimmings, embellishments and other specified items proposed to be increased from 3% to 5% and non-fusible embroidery motifs or prints proposed to be included in the list of items eligible to be imported duty free for manufacture of garments for export.
- Basic Customs Duty on raw materials for manufacture of spandex yarn8 proposed to be reduced from 5% to Nil.
Some key points pertaining to textile and handlooms are:
- Introduction of a Trade Facilitation Centre and a Crafts Museum to develop and promote handloom products and carry forward the rich tradition of handlooms of Varanasi.
- Textile mega-clusters to be set-up at Bareily, Lucknow, Surat, Kuttch, Bhagalpur, Mysore and in Tamil Nadu. Academy in HastkalaI for the preservation, revival and documentation of the handloom and handicraft sector in public private partnership mode in Delhi.
- A Pashmina Promotion Programme for the development of other crafts in Jammu & Kashmir.
LEGAL AND TAX FRAMEWORK
Important laws affecting the industry
- The Copyright Act, 1957
- Recognizes the copyright in relation to original literary, dramatic, musical and artistic work for a specified duration;
- Provides exceptions to protection such as 'fair use' and 'compulsory license'.
- Provides protection from unauthorized copying / use of copyrighted works and for remedies in case of infringement of copyright.
Thus, artistry becomes a subject matter of protection under the Copyright Act, 1957 as soon as the works are created. However, copyright in any design which is capable of being registered under the Designs Act, 2000 ceases as soon as any article to which the design has been applied is reproduced more than fifty times by an industrial process.
- The Trade Marks Act, 1999
- Provides protection to names, titles, word, letter, graphic artwork, shape of products, words and combination of colors.
- Provides for remedies in case of an infringement of trade mark.
Thus, the brand names and trademarks become the subject matter of protection under the Trade Marks Act, 1999.
- The Design Acts, 2000
- Provides for protections of designs which are new and which may be in the nature of features of shape, configuration, pattern, ornament or composition of lines or colors applied to any article, whether in two dimensional or three dimensional or in both forms, by any industrial process.
- The design in the finished article should be such that it appeals to and is judged solely by the eye;
- Provides for remedies in case of an infringement of design.
Thus, designs which appeal solely to the eye (such as motif designs) and which are likely to be reproduced more than fifty times by an industrial process become the subject matter of protection under the Design Acts 2000.
- FDI Policy
- Department of Industrial Policy and Promotion (DIPP) in press notes 4 and 5 (2012 Series) inserted / modified paragraphs 18.104.22.168 and 22.214.171.124 of the FDI Policy allowing Foreign Direct Investment (FDI) in single brand product retail trading (100%, up to 49% through the automatic route) and multi brand retail trading (51 percent) respectively with prior approval of the Foreign Investment Promotion Board (FIPB) subject to compliance of certain conditions. As a condition, in respect of FDI beyond 51%, sourcing of 30% of the value of goods purchased has to be done from India, preferably from Micro Small Medium Enterprises, village and cottage industries, artisans and craftsmen. FDI Policy also states that companies who engage in the activity of buying and selling by a company through the e-commerce platform would engage only in Business to Business (B2B) e-commerce and not in retail trading i.e. Business to Customer e-commerce (B2C).
Tax laws affecting the industry
- Where the franchisor receives franchise fees or royalties, tax has to be paid under the Income Tax Act, 1961 as income arising and accruing in India. Franchise fees would fall under the category of 'Profits or gains of business or profession' and will be taxed under Section 28 of the Income Tax Act, 1961. Royalty payments on the other hand will be taxed under Section 115A of the Income Tax Act, 1961.
- Further, where a non-resident franchisor sends management and other personnel to India, it may be required to withhold tax on salaries payable to such personnel for services rendered in India.
- The structure of franchise arrangement and the existence of DTAA between the countries involved may also have considerable influence on taxation.
- Under the Transfer Pricing Regulations, the fashion brands also need to make international transactions between related parties at arm's length price.
- The introduction of the Goods and Services Tax (GST) regime is also likely to be introduced in the near future and has already been tabled in Parliament. The GST will include indirect taxes like excise duty and service tax at the central level and value added tax (VAT) and local taxes on the state front.9 It is estimated that the introduction of GST would promote exports, raise employment and boost growth. It will divide the tax burden equitably between manufacturing and services.10
1 Note on Indian textile and clothing exports – International Trade Section, last updated: November 3, 2014. http://texmin.nic.in/sector/note_on_indian_textile_and_clothing_exports_intl_trade_section.pdf. Last Accessed: December 24, 2014.
2 http://www.ibef.org/industry/textiles.aspx. Last Accessed: December 24, 2014
3 DuPont, Reliance & Vipul Sarees launch ‘green’ saree line; dated December 23, 2014. Available at: http://www.fibre2fashion.com/news/fashion-news/newsdetails.aspx?news_id=169671. Last visited: December 24, 2014
4 Evolution of e-commerce in India – creating the bricks behind the clicks, Available at: http://www.pwc.in/assets/pdfs/publications/2014/evolution-of-e-commerce-in-india.pdf. Last visited: December 24, 2014.
6 32,000 M.T. at a CAGR of 7.14% by the terminal year of the 12 FYP
7 Twelfth Five Year Plan (2012-2017) – Economic Sectors – Volume II. http://planningcommission.gov.in/plans/planrel/12thplan/pdf/12fyp_vol2.pdf. Last Accessed: December 24, 2014.
8 Polytetramethylene ether glycol (PT MEG) and Diphenylmethane 4,4 di-isocyanate (MDI)
9 GST Bill to be introduced but not passed in winter session 2014; dated December 18, 2014. Available at: http://www.dnaindia.com/india/report-gst-bill-to-be-introduced-but-not-passed-in-winter-session-2014-2045161. Last accessed: Dece,ber 24, 2014.
10 http://gstindia.com/. Last accessed: December 24, 2014.