A report in Economic Times today suggests that the IT Department of Bangalore has issued a notice to the E Commerce players Amazon and Flipkart that the customer discounts given by them should be considered as “Capital Expenditure” and not a revenue expenditure.
The move is highly disappointing and will affect Consumer interests adversely besides hitting on Start ups and innovation.
It is a common accounting practice to consider some expenditure as “Revenue Expenditure” and some as “Capital Expenditure” based on the accountant’s perspective of the period in which the benefit would accrue to an entity.
Accounting is always done on a “Going Concern Basis” where it is expected that any expenditure made today is an investment for the long term benefit of the company as an ongoing business. In a “Gone Concern” approach, expenditure is written off immediately since the company is not expected to survive over the long run. Even as a “Going Concern”, certain expenditure particularly of small value is always written off as a revenue expenditure.
In most other expenditure, it is the discretion of the accountant to consider whether the expenditure should be recognized immediately or deferred.
Similarly even an income may be recognized immediately or deferred. Conservative accountancy recognizes expenditures ahead of time and spreads out the income over a longer period.
Deferment of income reduces the current profit in the P&L account while deferment of expenditure increases the current profit.
Taxation authorities are not concerned about the survival of business in the long run and try to maximize their revenue collection by squeezing out as much tax as possible from an entity. In the process, they often “kill the Goose that lays Golden eggs.”. History of many business failures in India can be traced to such irrational action by the taxation authorities in the past.
While certain assesses escape tax liability when they should not, many innocent and honest businesses often end up paying tax when there is no income. (P.S: This is not related directly to either Flipkart of Amazon but is quoted only as a general observation).
The E Commerce Companies are now caught in this battle between the Taxation official’s need to maximize the tax collections and the needs of business to grow.
By asking the E Commerce companies to treat the “Customer Discounts” as a “Capital Expenditure”, the tax authorities are forcing the companies to reduce their write offs during the current year and spread it over 4-10 years. This will increase the profits for the current year and increased tax liabilities.
As a result, the E Commerce companies may reduce the discounts and this will increase the prices to the detriment of the consumers.
The “Discounts” are real reduction of cash profits of the E Commerce companies and not merely a matter of “Discretion”. Hence, the current move is a move to disallow cash expenses and collect tax on profits which are not there.
The argument that the “Discounts” build “Brand” is untenable since the value addition to the “Brand” is only notional and does not convert into revenue unless the business is valued on a “Gone Concern” basis.
In the “Going Concern” basis, the “Brand Value” is only a means of raising capital in the form of equity at higher levels from investors or for better negotiation during mergers and acquisitions.
If “Notional Brand Value” is taxed, then every other expenditure including salaries paid, advertisements etc can also be deferred and current profits inflated.
If the decision to defer is taken by the management to increase the current profits and declare it in their balance sheets, it would be appropriate for the tax authorities to collect tax. But Tax authorities should not become “Accountants” who determine whether an expenditure has to be written off in one year or in 10 years. This is a gross abuse of the powers available to the tax authorities.
By increasing the immediate profit for taxation purpose and penalizing the companies, the cash availability in business will be reduced and this will hurt many start ups and make their business unviable.
We need to remember that E Commerce is not like the old brick and mortar business where there is land and building which keep appreciating over a period though valued only at costs and keep adding secret reserves to the companies. The E Commerce business lasts only for a few years and hence it is not possible to write off expenditure over a long period. Most companies donot exist for 10 years since the business model would become redundant within 3 to 5 years.
The society has migrated in social values and replaced “life long marriage” commitments with “marriage until divorce” concept. Similarly, business has also re-defined its principles from building an “Institution” to “Creating innovative idea houses”. These idea houses do spend as much as possible now to acquire customers and make hay while the sun shines.
Government anyway earns indirect taxes by way of all the E Commerce sales and the GST ensures that all transactions are accounted and taxed. Hence the Government should not be mean in looking at direct taxation to further squeeze the industry.
There is no doubt a pressure from Offline traders that E Commerce players are providing unreasonable discounts. These offline traders often conduct part of their business in cash and evade on the taxes. But the E Commerce players account every transactions since not only the sales but also the payments are all made through digital means and Government will get full revenue on the sales without any tax evasion.
Of course, because E Commerce cannot generate black money, they cannot also pay black money to get their liabilities reduced during assessments or bribe the politicians to get favourable policy formulations.
In the “Congress Culture” which Mr Modi wants to get rid off, the policy is to assist more dishonesty in the system because that generates money to the politicians. We suppose that the present Government wants a “Congress Mukta Bharath”. If that is so, the current move on the E Commerce players is considered regressive.
I request Mr ArunJaitely to look into the matter and set the priorities right.