Flipkart Loses Appeal Against Income Tax Panel’s $17 Mn Tax Demand

Income Tax panel has refused to stay the $17.2 Mn (INR 110 Cr) tax penalty on ecommerce major Flipkart on behalf of the tax assessed for FY15-16.

According to IT officials, Flipkart generated a profit of $63.52 Mn (INR 408 Cr) for FY15-16, while the company originally reported a loss of $124 Mn (INR 796 Cr) for the said financial year.

Flipkart has been asked by the Income Tax Appellate Tribunal (ITAT) in Bengaluru to deposit $8.5 Mn (INR 55 Cr) as tax and $8.5 Mn (INR 55 Cr) as a bank guarantee by February 28, 2018.

The tax has been levied on the recent discretion of the Income Tax department to make the ecommerce companies reclassify discounts and marketing spend as capital expenditure.

Earlier, in January 2018 reports surfaced that Flipkart has lost an appeal against the Income Tax (IT) department over the above issue. Later Flipkart filed an appeal to ITAT, which has now also refused to give the ruling in favour of Flipkart.

As per 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.”

An email sent to Flipkart did not elicit any response till the time of publication.

If Income Tax department gets successful on imposing the tax liability on Flipkart then the same stand can be expected for the next financial years including FY16-17 and FY17-18.

Also, this will also open the doors for IT department to recover taxes from other companies following the similar working model. Majorly this will include brands like Amazon India, Ola, Uber, Snapdeal, Shopclues and more.

So far, the industry has been seen opposing the Income Tax department’s purview of reclassifying discounts and marketing expenditures as capital expenditure.

This would mean that in future, in order to reduce their tax liability, consumer Internet companies, particularly the ecommerce platforms will have to reduce the massive discounts on their platforms, which is currently a major attraction for the Indian masses.

As per a RedSeer report, the cash burn in the industry during the September-October 2017 sale days was estimated to reach $370 Mn-$400 Mn up from $200Mn-$250 Mn last year, on a gross GMV of $1.05 Bn.

Earlier, Investor and former CEO of Infosys TV Mohandas Pai also suggested that ecommerce firms, particularly like Flipkart and Amazon should be exempted from reclassifying discounts as capital expenditure.

In any case, for now, the Indian ecommerce poster boy Flipkart is stuck in a war with the Income Tax officials. If Income Tax department is able to impose the tax liability on the company, in the upcoming years, it will be possible to see a different scenario for the entire Indian consumer internet sector,  thriving currently on the deep discount model.

[The development was reported by ET.]