Ecommerce player Flipkart has lost an appeal against the Income Tax (IT) department over the reclassification of marketing expenditure and discounts as capital expenditure, which involves substantial tax liabilities.
As per the ruling in December, the IT department wants ecommerce companies to reclassify discounts as not a cost but a capital expenditure, meaning that it should not be deducted from revenue.
The issue involves money spent by ecommerce companies on marketing through deep discounts. Flipkart along with Amazon India and other ecommerce companies have been classifying this as marketing expenses and deducting it from revenue, leading to them posting losses and therefore not being liable to tax.
The Bengaluru IT office had asked Amazon and Flipkart to reclassify marketing expenditure as capital expenditure. Both of them had approached the Commissioner of Income Tax (Appeals), Bengaluru, in August last year. Last month, the CIT (Appeals) hearing Flipkart’s case ruled in favour of IT department and said the company must reclassify its discounts and marketing expenses as capex.
As per the IT department, capital expenditure has to be spread over four to 10 years.
If the ruling goes through, companies such as Flipkart and Amazon India that incur substantial marketing costs could be deemed as being profitable and therefore liable to pay 30% tax. A senior executive at the company confirmed the development and told ET that it’s looking to challenge the order at the Income Tax Appellate Tribunal (ITAT) in the next few days.