I-T department asks Flipkart to reclassify discounts as capital expenditure

Online firm Flipkart has lost an appeal against the Income Tax department, under which it has been asked to reclassify its discounts as capital expenditure, which involves substantial tax liabilities. 

This ruling was made in December but has not been made public, according to the report in the Economic Times. 

Quoting a senior official, the report mentioned that the company will challenge the order at the  Income Tax Appellate Tribunal (ITAT) in the next few days.

The Bengaluru I-T office had asked Amazon and Flipkart to reclassify marketing expenditure as capital expenditure. Both approached the Commissioner of Income Tax (Appeals), Bengaluru, in August last year. In December, the CIT (Appeals) hearing Flipkart's case ruled in favour of I-T department and said the company must reclassify its discounts and marketing expenses as capex. Capital expenditure, according to the I-T department, has to be spread over four to 10 years, ET reported. 

Last year, the I-T Department asked e-commerce companies to restructure their marketing expenses under capital expenditure. E-commerce companies deduct discounts and marketing expenditure from their revenue, which leads to losses.

In its defence, the I-T department said that the money spent on marketing ishould come under capex as it creates intangibles and potentially generates revenue.

Capital expenditure or CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment.

Experts believe, if that becomes a norm, then the way startups do business in India would likely to change completely.

According to the report, Flipkart and Amazon could have to pay 30 per cent annually in tax when this move comes into effect. 

Meanwhile, it was reported that Flipkart will expand its 'MarQ' brand of consumer durables to offer ACs and smart TVs as it looks to drive more revenues from its private labels. 

Flipkart had launched the MarQ brand in October last year and currently sells microwave ovens, TVs and washing machines under the brand. 

MarQ's 'InnoCool' range of ACs (1 and 1.5 ton variants) will be available on Flipkart from April, while the 32-inch HDR smart TV will go on sale in May.

The ACs and smart TVs were unveiled at the CES, the world's largest consumer technologies show, in the US.

"Consumer durables are usually high-ticket items and consumers often tend to postpone the purchase to festive sale.

That is what we want to change," Flipkart Head of Private Labels and Electronics Adarsh Menon told PTI.