Reclassify discounts as capex, Income Tax Department to Flipkart

Homegrown e-commerce giant Flipkart, which is currently running a Republic Day sale, reportedly lost an appeal against the income-tax department in December over the categorization of marketing expenditure and discounts as capex.

According to a report in The Economic Times, the ruling which is not publicly known was about capital spent by e-tailers on marketing through deep discounts. Ecommerce players in the country have been lassifying this as marketing expenses and deducting it from revenue, leading to them posting losses and therefore not being liable to tax, it said.

The two online marketplace companies are engaged in a bitter battle to grab to top slot in the Indian e-commerce space. The December ruling may change the way cash burning e-tailers are taxed in the country. Online marketplaces, which often spend a substantial sum on marketing costs, could soon be deemed as being profitable and thus liable to pay 30 per cent tax.

In August last year, Flipkart and Amazon have appealed against an income tax order of Bengaluru I-T office. According to the I-T department, capital expenditure has to be spread over four to 10 years, the report said.

The development comes at a time when the issue of Angel tax is making headlines with a slew of startups getting slapped with notices from income tax department.

According to Finance Act if a private company, big or small, receives investment from an outsider who is India resident and the capital raised is more than the 'fair value', then the premium is taxable. Under Section 56(2)(viib) of the I-T Act this amount is considered as 'income from other sources' and is taxed at the colossal 30.9 per cent or even higher up to 34.61 per cent, depending on the amount of income.

Last year, Flipkart had raised an estimated $2.5 billion from Japan's SoftBank group.