Flipkart, others may pay more in taxes as I-T classifies sales discounts as capex

E-commerce firms like Flipkart and Amazon may have to pay up huge amounts in taxes after the Income Tax Department reclassified marketing discounts offered by online marketing companies as capital expenditure.

Bengaluru-based Flipkart last month lost an appeal against the I-T department over the classification of discounts offered in marketing products as marketing expenses.

E-commerce startups that spend huge amounts on buying customers through discounts and advertising could be in for a rude shock as the Income Tax department asks them to begin classifying their marketing expenses as capital expenditure.

With the I-T department reclassifying discounts offered in marketing exercise as capital expenditure Flipkart may now be looking at extensive tax liabilities post this ruling which was made in December,

Startups like homegrown e-commerce website Flipkart may now have to pay higher income taxes. The Bengaluru-based I-T company has lost an appeal against the I-T department over the reclassification of Flipkart may now be looking at extensive tax liabilities post this ruling which was made in December, according a report I The Economic Times.

Flipkart may now have to pay more than the 30 per cent tax on annual profits now applicable once the company turns profitable, says a report.

E-commerce companies like Amazon and Flipkart don't pay taxes at present as they incur losses despite huge sales turnover, which invited IT department attention.

Marketing spends by an e-commerce company creates market intangibles and the IT department wants these to be treated as capital expenditure instead of just a marketing expense.

According to the income tax department's assessment order the marketing costs of e-commerce companies constitute capital expenditure as they are creating intangibles that may aid future revenue.

However, the I-T department is yet to specify the amount of tax liability.

Flipkart and Amazon offer high discounts involving huge amounts of money to boost sales on special occasions.

The cash burn in the industry during the September-October 2017 sale days was estimated to reach $370-400 million, up from $200-250 million last year (on a gross GMV of $1.05 billion), as per a RedSeer report.

Not only Flipkart but US-based Amazon along with many telecom operators that spend huge amount of money on discounts and promotions may see similar tax issues, says the report.

The I-T department, however, is yet to specify the amount of Flipkart's tax liability.