E-Commerce Companies may face TAX HEAT – IT Department says discounts should be treated as CAPEX

IT Department feels that marketing cost (discount) should be treated as Capital Expenditure and not to be deducted from revenue.

Issue

Money spent by e-commerce companies on marketing through deep discounts should be treated as Capex. In today scenario, these companies have been classifying discount under the head of marketing cost as revenue expenditure and deducting from revenue and due to this they book loss in their account.

Income tax department now feels that this type of expenses should be treated as Capital Expenditure and not to be deducted from Revenue.

E-commerce companies don’t pay taxes as they make losses. If their revenues surge due to categorisation of marketing cost, they may book profit and will have to pay taxes.

Last year also, IT Department had asked e-commerce companies to re-categorize marketing expenditure under capital expenditure. 

Effects on Start-ups

Start-ups have to incur heavy expenses to promote their products and services, if such tax demands are made, start-ups including several e-commerce companies will start facing the tax heat from the tax department.  People usually do online shopping for discount on sales, if discounts are withdrawn then e-commerce industry mainly start-ups would disappear from the market as this will increase the tax burden on start-ups.

Indian government has taken initiative of start-ups India which aims at promoting entrepreneurship, but if tax burden is not reduced then how would entrepreneurs sustain business?   

One by one government has taken many initiatives like Make in India, Startup India and Digital India, what would be the benefit of this as main target is e-commerce companies. How Digital India would work if discounts are withdrawn? 

What Economic Times Report Says

According to Economic Times Report, Flipkart has just lost its appeal at the leave of 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.

Flipkart and Amazon both approached the Commissioner of Income Tax (Appeals) in last year, now CIT (Appeals) hear the case and ruled in favour of IT Department said the company must reclassify its discounts and marketing expenses as Capex, according to the IT Department, has to be spread in next 10 years.

Next Step, Flipkart can take

The next step would be to challenge the order at Income Tax Appellate Tribunal (ITAT) in next few days.

Flipkart is not the only one to be faced with this situation, it is one of those issues which is yet to be settled with arguments.