Looks like there is no end to the troubles for e-commerce companies. Where e-commerce giants like Flipkart and Amazon are in the tug of war to stay on the top of the chart, here comes the another development for them giving them a sleepless night. The e-commerce majors are now facing the possibility of having to pay tax as per an income tax order of last year.

E-commerce giants like Flipkart and Amazon have approached the Commissioner of Income Tax (Appeals), Bengaluru last month after an assessment order of last year asked them to reclassify marketing expenditure as capital expenditure, a report in Economic Times said.

Speaking on the development, Sanjay Sanghvi, partner (tax) at law firm Khaitan & Co told ET, “The Assessing Officer (of income tax) has no say in dictating terms of business to a taxpayer, as to how to run his business. There are enough judicial decisions supporting this proposition.”

The firms have appealed against this income tax order as it involved money spent by these firms on marketing done through deep discounts.

If reports to be believed, these companies have been classifying it as marketing expense and deducting it from revenue, leading to huge losses.

However, the income tax department says that such expenses should be reclassified as capital expenditure and can’t be classified as marketing costs and so shouldn’t be deducted from revenue. And the justification given by the tax department is that marketing costs constitute capital expenditure as what the marketing costs are spent on may aid future revenue.

According to ET reports, if the tax department's methodology is followed, e-commerce companies could turn profitable and be liable for tax in India.

While Flipkart and Amazon’s appeal was heard by the CIT, there were no immediate decisions taken.

Experts informed ET that the revenue department's stand could open a ‘Pandora's Box’ for several startups and e-commerce companies as it dictates how entrepreneurs must conduct their businesses.

According to another expert, the assessing officer has no say in dictating terms of business to a tax payer as what business expenditure to incur and what quantum is something that’s up to the business to decide.

It seems that these troubles are not going to end anytime soon. E-commerce firms have to fight a fierce battle to stay in the Indian market. In August 2017, the Department of Industrial Policy and Promotion (DIPP) has specified that e-commerce companies doing business in the country will not be allowed to market more than 25 per cent of its annual sales coming from one vendor.

Though the government had earlier already mandated 25 per cent maximum sales from a single vendor it had failed to provide the duration for computation of the sales. The aim behind this is to provide investors with a friendly investing environment and attract more FDI into the country.

Now time will only tell how these e-commerce majors will fight with these new policies and will stand out in the market

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