In what could become a gamechanger for the ecommerce business in India, the Income Tax Appellate Tribunal (ITAT) has rejected the appeal made by Flipkart against an earlier decision by the department to impose a penalty of $17 million (Rs 110 crore).
The tax assessing authority has not accepted the practice of treating discounts and marketing spends as revenue expenditure and to show losses in the operations. The department wants these expenses to be reclassified as capital expenditure and amortized over a few years. If this is done, then Flipkart’s business will show it has made profits and therefore the income tax on it becomes payable. This amount is for the financial year 2015-16. The company had originally declared a loss in its books of Rs 796 crore. The new order from the department requires Flipkart to pay up Rs 55 crore directly and provide a bank guarantee for the amount before February 28.
The plea by the online retailer to stay the operation of the demand due to its financial situation also did not find favor with the IT authorities since they felt such financial hardship, in their opinion, does not exist.
If this decision stays, then similar fate awaits Flipkart for the subsequent financial years 2016-17 and 2017-18. More significantly, the axe will fall on almost every other company operating in the ecommerce space in India, large and small. These will include Amazon India, Snapdeal and Shopclues and so on. Besides these firms, companies like Uber and Ola, which are cab aggregators, but follow similar practices of offering huge discounts to attract customers and reflect these as regular business expenses and show operating losses are likely to be affected.
If the department and the government does not yield then it would be interesting to watch how these companies will go about structuring their businesses and what will happen to the discounts being offered to the customers.
Flipkart has found a supporter in former CEO of Infosys, Mohandas Pai who feels the concept of treating the discounts and marketing outgo as part of the operating costs should be permitted for online retailers. It may be for the government to come out with a notification in this regard.