The discount offered by e-commerce and ride-hailing firms are creating market intangibles. Thus it might be counted as capital not the cost for the company, said an income tax official.
At present many firms including e-tailers and ride-hailing firms like Ola and Uber categorise discounts and marketing costs as revenue expenses. If the discount is explained as capital expenditure then it will liable the company to pay taxes, said an ET report citing Flipkart example in an ongoing case.
Flipkart, which has been asked to reclassify discounts and marketing spend as capital expenditure, will have to pay Rs 110 crore to income tax for the year 2015-16.The Income Tax Appellate Tribunal has asked home-grown e-tailer to deposit Rs 55 crore and provide bank guarantees to the tune of Rs 55 crore by February 28, added the report.
The company had posted a profit of Rs 408 crore for the financial year 2015-16 and reported a loss of Rs 796 crore. In FY 2016-17, Flipkart reported a higher loss of 68 per cent at Rs 8,771.4 crore. The revenue of the company, however, grew by 29 per cent and stood at Rs 19,854.6 crore in the last fiscal.
Meanwhile, Flipkart pleaded the income tax demand to have stayed. The company said it would cause financial hardships for the company.
However, the tribunal said there was no financial hardship on the ground of prima facie. The income tax department’s stand is that discounts and large marketing costs are part of brand building.
Besides, in December last year, the govt has brought in amendments to the Legal Metrology (Packaged Commodities) Rules, which also bans the practice of dual MRP for the same product for all packaged items. All e-commerce companies were asked to add details as part of the product display slide on their websites.
Generally, Flipkart and Amazon reimbursed the discounts offered on products that vendors sell online.
According to industry experts, redefining discounts or marketing costs could alter the way companies record their income and expenses. While the current tax demand is for 2015-16, similar demands may be raised for other financial years.
The tax demands will create trouble for companies such as Amazon, Snapdeal, Ola and Uber, who also trade through discounting model.