The income tax appellate tribunal (ITAT) on Wednesday rejected the government’s move to reclassify discounts offered by Flipkart as capital expenditure, a move that would have prevented the online retailer from claiming tax deductions.
The Bengaluru bench of ITAT rejected the Rs. 110 crore additional tax sought by the tax department from Flipkart for the year ended 31 March 2016.
In January 2018, Flipkart had lost an appeal against the income-tax department over the reclassification of marketing expenditure and discounts as capital expenditure, which involves substantial tax liabilities. The issue involves money spent by eCommerce companies on marketing through deep discounts. Flipkart, along with Amazon and some of the other big eCommerce companies have been classifying this as marketing expenses and deducting it from revenue. So the revenues are posted as negative, i.e. losses. So no tax is paid on them.
Experts have commented that many other startups that spend huge amounts on discounts to promote brands could see similar tax issues in future.
So the ITAT’s ruling is a boost for e-commerce companies, which now classify discounts on products as tax-deductible advertisement and marketing expenses.
Flipkart argued that it needs to incur such expenses every year to sell its products and retain its market share and thus the entire amount is tax-deductible. The tax department, on the other hand, had treated such expenses as capital expenditure and said such spending created brand value and marketing intangibles for Flipkart.