Flipkart To Pay Additional Rs. 110 Crore In Tax Because Authorities Want It To Classify Its Discounts Differently

Are the discounts that Flipkart provides to its customers a capital expenditure or a revenue expense? That, in essence, has become Flipkart’s Rs. 110 crore question.

The Income Tax Appellate Tribunal has asked Flipkart to reclassify its discounts as a capital expenditure instead of a revenue expense. This would mean that Flipkart, which had reported a loss of Rs. 796 crore in 2015-2016, would instead have to report a profit of Rs. 408 crore for the period. That, in turn, would mean that the already loss-making company would have to cough up an additional Rs. 110 crore in tax. 

flipkart tax 110 crore

Thus far, online marketplaces like Flipkart and Amazon have been classifying the discounts they provide as a revenue expense. To understand this, lets assume Flipkart has a product in its warehouse that it purchased for Rs. 60, and will sell on its website for Rs. 100. But Flipkart also competes with other companies, and decides to provide a discount of 30% on the price of the product. Flipkart currently counts the discount of Rs. 30 as an expense, thus making its total expenses equal to the sum of the price of the product and the discount, which is equal to Rs. 60+ Rs. 30 = Rs. 90. Flipkart’s profit is thus Rs. 100 – Rs 90 = Rs. 10. If the tax rate is 30%, Flipkart would have to pay a tax of Rs. 3.

What the Income Tax Tribunal argues, though, is that Flipkart’s discount doesn’t only give it an immediate benefit — the discount will build its brand, and help win the loyalty of its customers. The benefits of this one discount could extend over a long period, thus the Income Tax Tribunal wants Flipkart to recognize the discount not as a revenue expense, but as an asset on its balance sheet. Assets lose value over time, and this can be introduced as an expense on the income statement through depreciation and amortization. For instance, if Flipkart buys a truck for Rs. 50 lakh to transport goods, and the truck is expected to last 10 years, Flipkart can deduct 1/10 of the value of the truck, or Rs. 5 lakh as an expense every year, as opposed to Rs. 50 lakh immediately. 

The Income Tax Tribunal wants Flipkart to classify its discounts as how it would classify its physical assets like trucks. This means that Flipkart will have to show greater profits, and thus pay higher taxes. In the previous example, if Flipkart’s discount of Rs. 30 were classified as an asset, and it was assumed that this discount would hold value for Flipkart for 10 years, Flipkart would be only able to deduct 10% of the Rs. 30 discount as an expense, or Rs. 3, in a particular year. Flipkart’s profits are, thus, 100 – (60 + 3) = Rs. 37. At a 30% tax rate, Flipkart would have to pay taxes of Rs. 11. In Flipkart’s current method, it only needs to pay taxes of Rs. 3.

It’s this reclassification that has led to an additional Rs. 110 crore tax liability for Flipkart in 2015-2016. Flipkart had appealed the judgement, but its demand for a stay on the judgement has been refused, and the company has been asked to deposit Rs. 55 crore and provide bank guarantees to the tune of Rs 55 crore by February 28. Flipkart had argued that the tax would cause ‘”financial hardships for the company,” but its appeal was rejected.

Rs. 110 crore isn’t a lot of money for Flipkart — it raised $4 billion (Rs. 26,000 crore) last year. But the Rs. 110 crore tax demand is only for 2015-16 — if the judgement goes through, Flipkart will not only have to pay higher taxes for the next two years, but for all years that follow. This judgement is crucial because it doesn’t only impact Flipkart — most e-commerce companies do their accounting this way, and could lead to a much higher tax bill for the whole industry.

And that won’t be good news for the sector. E-commerce in India is already struggling — Snapdeal fired most of its staff last year after it ran out of cash, and Flipkart, Amazon and Paytm are currently all losing large amounts of money. An additional tax bill is the last thing the e-commerce industry needs at the moment, but with income tax authorities seemingly of the view that these companies have been artificially inflating their losses to avoid taxes, a larger tax bill might just be unavoidable for the entire sector.

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