An income tax tribunal refused to stay a Rs 110 crore tax demand on Flipkart after the e-commerce platform was asked to reclassify discounts and marketing spend as capital expenditure. The move is expected to have an impact on Amazon and other online retailers who face similar tax liabilities.
The Economic Times reported that Income Tax Appellate Tribunal (ITAT) in Bengaluru asked Flipkart to deposit Rs 55 crore and provide bank guarantees to the tune of Rs 55 crore by February 28. While the tax assessed is for 2015-16, similar demands may be made for subsequent years. Hearings will continue after February 28.
The revenue authorities demanded taxes of about Rs 110 crore on an estimated profit of Rs 408 crore for the financial year 2015-16 when Flipkart originally reported a loss of Rs 796 crore.
Currently, companies categorise discounts and marketing costs as revenue expenses, spending on factory construction is considered a capital expenditure. With discounts being classified revenue expenses companies can show a net loss in earnings, therefore, be exempt from paying domestic taxes. With the new classification, Flipkart will now be a profit making company and liable to pay taxes.
In January, it was reported that Flipkart lost an appeal against the Income Tax (IT) department over the above issue. The appeal had then been turned down by the Commissioner of Income Tax (Appeals), Bengaluru. Later Flipkart filed an appeal to ITAT, which has now also refused to stay the tax demand.
According to reports, Flipkart asked the stay on tax demand “because it would cause financial hardships for the company”. However, ITAT refused Flipkart’s plea on the ground that “prima facie, there was no financial hardship.”
No more discounts?
This decision might set a precendent in favour of similar tax demands from other e-commerce companies. Amazon is currently appealing against a similar tax demand. Brands like Ola, Uber, Snapdeal, Shopclues among others may also be affected by this.
So far, the industry has been seen opposing the Income Tax department’s purview of reclassifying discounts and marketing expenditures as capital expenditure.
Will this mean lesser discounts from online retailers? Possibly but the steep discounts are marketed as part of the appeal of shopping online. Companies like Amazon and Flipkart usually host multliple sale events that offer steep discounts and generate a large amount of sales. This order may lead to a scaling back of that. It will be interesting to see if consumers will still choose to buy online in absence of large discounts, as it is likely that lower prices rather brand loyalty is what drives these purchases.