Flipkart may pay higher taxes after posting discounts as capital expenditure

Startups like homegrown e-commerce website Flipkart may now have to pay higher income taxes. The Bengaluru-based IT company has lost an appeal against the IT department over the reclassification of marketing expenditure and discounts as capital expenditure.

Flipkart may now be looking at extensive tax liabilities post this ruling which was made in December, a report by ET read on Monday.

A 30% tax rate on annual profits of Flipkart may now be applicable as the company will turn profitable, the report added.

The IT department got involved in a tax feud by e-commerce companies like Amazon and Flipkart that don’t pay taxes as they incur a loss.

Marketing spends by an e-commerce company creates market intangibles and so the IT department thinks these should be treated as capital expenditure instead of just a ‘market expense’.

The tax department, in its assessment order, justified its stance by claiming that marketing costs for ecommerce companies constitute capital expenditure as they are creating intangibles that may aid future revenue.

However, the IT department is yet to specify the amount of tax liability.

Flipkart and Amazon pumped in a huge amount of money to provide attractive discounts on sale days.

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.