Tax ruling on Flipkart can hit other e-retailers

Tax ruling on Flipkart can hit other e-retailers

Flipkart has lost an appeal against the tax department that had asked the company to categorise its marketing expenditure and discounts as capital expenditure, the Economic Times reported on Monday.
Flipkart is likely to appeal the ruling. But if it stands, the ruling has the potential to impact how other ventures who employ similar methods are taxed. Flipkart currently deducts marketing and discount costs in their entirety from their revenue to arrive at taxable income.
But if it goes by the tax department's directive and treats them as capital expenditure, then it cannot deduct the full amount because the impact of such expenditure is spread over several years. This could make the company profitable (or more profitable), and therefore liable to pay more tax. "If this ruling stays, startups will have to shell out more in tax, which will be an additional liability for them.We'll have to see how Flipkart moves against the ruling," a lawyer said. Another industry executive said it was a case of traditional establishments like tax departments clashing with new businesses and that such matters will take longer to solve.
The tax department's contention is that the discount is not related to the company's business as it is promoting someone else's brand, and therefore cannot be eligible for a full deduction from revenue. "This is being ridiculous," says a tax expert.