E-tail giant Flipkart has lost an appeal against the Income Tax (IT) department for reclassifying marketing expenses and discounts as capital expenditure. According to news reports, IT department contends that e-commerce companies should restructure their marketing expenses and discounts as capital expenditure and not as revenue expenditure.

The IT department is of the view that the money spent on discounting and marketing is a cost incurred to increase the company's brand value. This is different from a brick and mortar retailer giving discounts because companies like Flipkart and Amazon spend big bucks and offer discounts not just to increase sales but change customer behavior, that is, get customers to start shopping online rather than go to retail stores. This increases their goodwill, number of customers and also the revenue per customer, which further improves the intangible assets of these companies, such as valuation and brand recall whose benefits will spill over to the next few years.