Government seeks to tax Netflix income in India

India is seeking to tax Netflix Inc.’s income earned from streaming services in the country, people familiar with the matter said.

It’s the first such move to tax overseas digital companies providing electronic commerce services to consumers in India, they said.

The income tax authorities have held that the US-headquartered entertainment company has a permanent establishment (PE) in India and is thus liable to get its income in the country assessed for tax.

In a draft order, the tax authorities attributed about Rs 55 crore income to Netflix’s Indian PE in the assessment year 2021-22, they said. 

The tax officials have reasoned Netflix had some infrastructure and employees from the parent entity on secondment in India to support its streaming services, leading to a PE and tax liability in the country.

Tax authorities have in multiple instances in the past held that the presence of seconded employees, those loaned for a short period, formed a permanent establishment of the foreign company in India.

Netflix rolled out its streaming services in India in 2016 and currently has over 6 million subscribers in the country.

According to Netflix Entertainment Services India’s financial data, sourced by Tofler, the company ended FY21 with gross revenue of Rs 1,529.36 crore. 

Netflix India posted a 30% growth in total viewing hours year-on-year, while revenue rose 25% in FY21-22 from a year earlier, Monika Shergill, vice president, content, said in a recent interview.

India contributed the highest net subscriber additions globally in 2022, driven by the launch of an aggressive pricing plan in December 2021, backed by a slate of Indian originals and licensed movies.

India is the largest market in the world by time spent on over-the-top (OTT) services, according to an EY media report. Experts say that subscription revenues for the OTT market in India are poised to touch $3 billion by 2024.

India had in 2016 introduced the so-called ‘Google tax’ on digital advertisements and widened it in 2020 to include e-commerce supplies or services to address the issue of income of digital companies escaping taxation in the country despite earning revenues through a large user base.

Tax experts say global digital companies will need to examine their operations in the country from a tax point of view.