Picture this. You set up shop and toil for years to gain a customer base. You’ve pumped in millions of dollars of capital to compete with players both domestic and foreign. It’s been years, and your efforts are paying off. You have millions of customers but have posted losses year after year. Then, one day, you get a notice from the tax officials. It not only claims that you are you profitable, but that you owe close to Rs 140 crore ($20.4 million) in taxes. This isn’t some random hypothetical scenario. It’s what happened to Flipkart on 22 December 2017. An early Christmas present from tax authorities to themselves, if you will.
Tax authorities had looked at Flipkart, wondered how a loss-making entity was valued at a premium, and then got to work turning Flipkart into a profitable and taxable business. It added the money Flipkart spent on discounts and marketing, creating a fiction called a marketing intangible asset. According to this theory, profits were to be calculated after excluding these expenses from the profit and loss account. Why? Because the benefit of these expenses extends beyond one accounting period. So let’s add that back based on a standard margin for a wholesaler.
And voila, Flipkart becomes a profitable business on which the income tax department can levy tax and penalty. And levy tax and penalty it did. Flipkart had filed a loss of Rs 796 crore ($116 million). The revenue authorities claimed it had made a profit to the tune of Rs 408 crore ($59.5 million). And a tax demand of Rs 137 crore ($20 million) was placed on Flipkart.
Flipkart fought the order, after which the tax demand was reduced to Rs 110 crore ($16 million). Both the income tax department and Flipkart made subsequent appeals against the order to the Income Tax Appellate Tribunal, which eventually threw out the income tax department’s case, saying that its theory of a marketing intangible asset and Flipkart’s profitability were “without any basis”.
Even as Flipkart and rivals like Amazon who would have been similarly affected heaved a sigh of relief, e-commerce players were in for another shocker. In late July, in response to a Right To Information (RTI) query, the Reserve Bank of India (RBI) decreed that e-commerce players were not allowed to collect cash through their logistics partners. Curiously, the law granting RBI this power has been on the books for nearly a decade. It took an RTI for the RBI to wake up to this and interpret it. With seemingly little concern for businesses and the market, especially given that cash on delivery forms a huge part of payments for e-commerce companies.
The e-commerce market in India is exploding, with a 2015 UBS projection claiming it would be worth $50 billion by 2020.