India to tax Netflix from streaming services

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India has reportedly taken steps to tax the income earned by Netflix Inc. from its streaming services in the country. This move marks the first attempt by India to tax overseas digital companies that provide e-commerce services to Indian consumers. The income tax authorities have claimed that Netflix has a permanent establishment in India and should therefore have its income assessed for tax purposes within the country.Preliminary findings from the tax authorities suggest that around Rs 55 crore of income has been attributed to Netflix’s Indian permanent establishment in the assessment year 2021-22.

The authorities argue that the presence of infrastructure and seconded employees from the parent company in India to support Netflix’s streaming services creates a permanent establishment and tax liability in the country. In the past, tax authorities have considered the presence of seconded employees as constituting a permanent establishment for foreign companies in India.Netflix introduced its streaming services in India in 2016 and currently boasts over 6 million subscribers in the country. According to financial data obtained from Netflix Entertainment Services India, the company recorded gross revenue of Rs 1,529.36 crore in the fiscal year 2020-21. Netflix India experienced a 30% growth in total viewing hours year-on-year, with revenue rising by 25% in FY21-22 compared to the previous year.India is the world’s largest market in terms of time spent on over-the-top (OTT) services, as reported by EY.

Experts predict that subscription revenues for India’s OTT market will reach $3 billion by 2024. India has made a case at the Organisation for Economic Co-operation and Development (OECD) for the right to tax digital revenues in the jurisdictions where they are generated.In 2016, India introduced the “Google tax” on digital advertisements, expanding it in 2020 to include e-commerce supplies and services. This aimed to address the issue of digital companies earning revenue from a large user base in India while evading taxation.

Tax experts suggest that global digital companies will need to carefully assess their operations in India to ensure compliance with tax regulations. The attribution of profits becomes particularly complex and arbitrary in the absence of specific guidelines when tax authorities assert the presence of a significant economic presence in India.

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