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In what could have an implication for the largest e-commerce landscape in India, the Income Tax Appellate Tribunal (ITAT) has refused to stay demand of Rs 1.1 billion on Flipkart after the e-commerce major was asked to reclassify the discounts and marketing spend as capital expenditure. The Bengaluru-based income tax panel has asked Flipkart to deposit Rs 550 million and Rs 550 million as bank guarantees by February 28. According to revenue authorities, India's largest retailing platform generated a profit of Rs 4.08 billion in the financial year 2015-16 when the company originally had a loss of Rs 7.96 billion. In February, Flipkart approached ITAT and pleaded the demand be stayed, stating it would cause "financial hardships" for the company, the Economic Times reported.
The plea was refused on the ground "prima facie, there was no financial hardship".The companies currently put discounts and marketing cost as revenue expenses and capital expenditure is spendings on factory construction. When discounts come under capital expenditure, the company becomes a profit-making institution and is payable of domestic taxes. According to Amit Maheshwari, partner at Ashok Maheshwari & Associates LLP, the discounts are necessary to survive in retailing business and do not result in enduring profit, ET reports. If the I-T department is successful on the imposition on Flipkart, then the same stand on the next financial years of 2016-17 and 2017-18 and will also open doors to recover taxes from other e-commerce giants, such as Amazon India and Snapdeal. With this, the e-commerce companies will have to cut short on the deep discount model which it currently thrives on to attract the crowd.