An assessment order of last year asked ecommerce companies to reclassify marketing expenditure as capital expenditure.

Ecommerce cos appeal against tax depts order treating discounts as capital spend Image for representational purpose only
Atom Ecommerce Saturday, September 02, 2017 - 14:55

At a time when ecommerce companies are fighting a fierce battle to stay on top on the market in India, they are now facing the possibility of having to pay tax as per an income tax order of last year.

According to a report in Economic Times, ecommerce giants like Flipkart and Amazon have approached the Commissioner of Income Tax (Appeals), Bengaluru last month after an assessment order of last year asked them to reclassify marketing expenditure as capital expenditure.

They have appealed against this income tax order as it involved money spent by these firms on marketing done through deep discounts.

ET reports that these companies have been classifying it as marketing expense and deducting it from revenue, leading to huge losses. 

However, the income tax department says that such expenses should be reclassified as capital expenditure and can’t be classified as marketing costs and so shouldn’t be deducted from revenue. And the justification given by the tax department is that marketing costs constitute capital expenditure as what the marketing costs is spent on may aid future revenue.

If the tax department's methodology is followed, ecommerce companies could turn profitable and be liable for tax in India, according to the ET report.

While Flipkart and Amazon’s appeal was heard by the CIT, there were no immediate decisions taken.

Experts told ET that the revenue department's stand could open a ‘Pandora's Box’ for several startups and ecommerce companies as it dictates how entrepreneurs must conduct their businesses. 

The assessing officer has no say in dictating terms of business to a tax payer as what business expenditure to incur and what quantum is something that’s up to the business to decide, an expert told ET.

“The Assessing Officer (of income tax) has no say in dictating terms of business to a taxpayer, as to how to run his business. There are enough judicial decisions supporting this proposition," Sanjay Sanghvi, partner (tax) at law firm Khaitan & Co told ET.

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