US-based major OTT player Netflix is facing potential tax implications from the Indian government as income tax authorities seek to tax its earnings in the country. According to a draft order reported by ET, the tax authorities have attributed approximately INR 55 crore ($7.4 million) income to Netflix’s Indian Permanent Establishment (PE) for the assessment year 2021-22, indicating the government’s intention to levy taxes on that amount.
Tax officials argue that Netflix has established infrastructure and employed seconded staff from its parent entity in the US to support its streaming services in India. This situation creates a potential PE and tax obligation within the country, according to the authorities. The presence of seconded employees on short-term assignments has previously been cited by tax officials as a factor leading to the formation of a PE for foreign companies in India.
If implemented, this would mark the first instance of India applying taxes on the income earned by a foreign digital company offering electronic commerce services to Indian users. Netflix’s co-CEO Ted Sarandos had earlier highlighted India as the fastest-growing market for the streaming service, with a 30% increase in engagement, watch time, and 25% rise in revenue in 2022. Netflix’s success in India has been attributed to its aggressive strategies of reducing subscription costs and producing India-focused content.
Notably, Netflix has made efforts to localize its operations in India, with Sarandos stating, “Unlike many companies in California, we manage India in India.” This statement was made following Netflix CEO Reed Hastings expressing frustration in 2022 over the company’s struggle to achieve success in India.
As Netflix works to maintain its user subscription base, rival OTT platform Disney+Hotstar is witnessing a migration of its customer base to Reliance’s Jio Cinema. This shift comes after Disney+Hotstar failed to renew streaming rights for popular content such as the Indian Premier League (IPL), HBO, and Formula 1. The evolving competition in the Indian OTT market poses challenges for major players like Netflix and Disney+Hotstar as they strive to capture and retain audiences in a rapidly growing and dynamic industry.
