If that happens, companies such as
Flipkart and
Amazon that incur substantial marketing costs could be deemed as being profitable and therefore liable to pay 30% tax. Flipkart didn't respond to an email sent on Thursday. A senior executive at the company, however, confirmed the development and added it's looking to challenge the order at the Income Tax Appellate Tribunal (ITAT) in the next few days.
For instance, a company incurs Rs 100 crore in marketing costs. If classified as revenue expenditure, this will be deducted in one financial year. If classified as capital expenditure and amortisation of 10% is applied over 10 years, then only Rs 10 crore will be deducted in a financial year. In the second scenario, the company will end up making a profit and have to pay 30% annually.
Experts said the revenue department's stand will hit startups and ecommerce companies and that it appears to dictate how entrepreneurs must conduct their businesses. "The tax department is obviously picking on the companies' oft-repeated claim that the discounts are aimed at accruing market share for future profitability, but it's highly unlikely that such reasoning will stand scrutiny in courts," said Abraham C Mathews, a Supreme Court advocate. "Supreme Court rulings have held that even if the benefit is of enduring nature, it can be classified as revenue expense."
