Will the era of huge discounts being offered by the leading ecommerce firms like Flipkart and Amazon come to an end? If the Indian Income Tax authorities have their way, the answer might be yes. According to an Economic Times report, Flipkart has just lost its appeal at the level of the Commissioner of Income Tax (Appeals) to allow them to include the cost the company incurs on the deep discounts they offer to the customers as revenue expenditure and therefore as loss of revenue.
The Income Tax department, however, argues that such costs are meant to build the business and brand and should therefore be treated as capital expenditure and amortized over a period. The immediate fallout of this ruling is that the ecommerce companies cannot claim any deductions of these discounts and other marketing expenses and will end up shelling out 30% as tax on the recalculated values.
They may not be deemed as loss-making companies. The next stage for Flipkart is the Income Tax Appellate Tribunal (ITAT). The ITAT can rule in favour of the company and against the IT department. The Flipkart case can also become a test for all the ecommerce sites like Amazon, Snapdeal and a host of other online retailers who offer discounts ranging from 5% to 50% and even above.
This issue is not being brought forth by the Income Tax authorities for the first time and Flipkart is not the only company to be faced with this situation; it is one of those issues yet to be settled with arguments on both sides being advanced by the experts in these matters.
Explaining it further, the ET report states that if a company ends up spending Rs 100 crore in an accounting year towards marketing expenses including offering heavy discounts to attract more customers and on other promotional activities, the company can only take benefit of Rs 10 crore in that year by adding it to the expenses, not the entire amount. The remaining Rs 90 crore will be similarly amortized over the succeeding 9 years. The removal of this Rs 90 crore component will show up as profit and the company will have to cough up 30% of the profit is taxes. So, it’s a double whammy for these startups.
Some experts say that the move by the IT department may not stand the scrutiny of the courts once the companies approach for relief legally.