INTRODUCTION
The introduction of digital streaming platforms has completely changed the entertainment landscape by providing easy access to a vast selection of films, TV series and unique material. Netflix has become the clear leader among these channels, enthralling Indian fans with its extensive collection of content. But as demand for and revenue from digital streaming services grows, concerns about their taxes in India surface. Taxation authorities need help implementing a just and equitable taxation system as the digital economy grows. Determining the proper tax responsibilities is difficult due to the digital services’ fast expansion and cross-border nature. Considerations for taxation in the digital domain include jurisdictional concerns, business models, and the dynamic nature of technological development.[1]
There are several reasons why the digital economy needs to be taxed. First and foremost, taxation ensures that companies doing business in a nation contribute to its public coffers and infrastructural advancement. Governments depend on tax income for public services like healthcare, education and infrastructure that benefit private sector companies and society. Furthermore, by guaranteeing that all enterprises, regardless of how they operate, contribute fairly to the economy, taxes foster justice and equity. Taxation becomes essential in the case of digital streaming platforms to avoid a scenario where these platforms obtain a competitive advantage over conventional media outlets subject to more onerous tax restrictions.
INDIA’S CURRENT TAXATION SYSTEM
India’s current tax rules and regulations control how digital businesses including streaming services like Netflix are taxed. However, because digital transactions are borderless and digital business models are constantly changing, applying these regulations to the digital economy presents particular difficulties. The Income Tax Act 1961[2] is now India’s primary tax law controlling digital transactions. This Act imposes income tax on the earnings of companies doing business in India, including online streaming services. These platforms have to abide by the Act’s requirements and satisfy their tax duties by the established guidelines.
Domestic and international firms must file their tax returns for an assessment year under Section 139 of the Income Tax Act[3]. After each fiscal year, every firm should submit its income tax return and, if applicable, its tax credit claim. Digital services in India may be subject to GST (Goods and Services Tax) and Income Tax. India has implemented a comprehensive Indirect Tax known as GST on selling goods and services. It attempts to establish a uniform tax system nationwide by replacing several indirect taxes, including the service tax. Online information and database access or retrieval services (OIDAR), which include streaming services like Netflix, are categorised as digital services and are subject to GST. The Indian tax system does provide a basis for taxing digital transactions. Still, there are endless questions and disagreements about how well it is suited to capture the value produced by digital firms. The complexity of digital transactions and the constantly changing nature of the digital economy make it difficult for tax authorities to determine the proper tax treatment.
CHALLENGES IN TAXING NETFLIX
Whether or not Netflix has a permanent base in India is one of the key legal questions that must be considered. A permanent establishment is a set location where a firm conducts its operations. If Netflix is determined to have a permanent operation in India, its income—not only the money from Indian subscribers—will be liable to taxes. Regarding international taxes, whether a foreign firm conducts its business through a permanent establishment (or “PE”) determines whether its revenue is subject to taxation in a domestic jurisdiction. The definition of a PE, according to Indian law, is ‘a fixed place of business through which the business of a foreign enterprise is carried on wholly or in part.’ [4]A PE offers a way to decide how to tax businesses that may have extensive operations across several nations. India taxes a non-resident company’s commercial revenue that comes from (or accrues from) it’s PE in India, whether it does so directly or indirectly. Therefore, it becomes crucial for businesses to know whether PEs are founded in a particular nation.
The Indian authorities must consider many things while deciding whether or not Netflix has a permanent base in India. These elements consist of the following:
- Is there a physical Netflix presence in India? Does Netflix, for instance, have offices or storage facilities in India?
- Are there workers at Netflix in India?
- Are Netflix’s services available to users in India?
If Netflix is determined to have a permanent operation in India, its income—not only the money from Indian subscribers—will be liable to taxes. This may significantly affect Netflix’s financial results. The appropriate tax rate would be another legal problem that would need to be taken into account. The Indian government has not yet disclosed the tax rate for overseas digital enterprises. However, it is anticipated that the tax rate would be greater than the tax rate that Indian businesses are currently subject to. Netflix’s services may become less competitive in India if taxed more heavily than Indian businesses. As a result, Indian streaming providers may overtake Netflix regarding market share.
DOUBLE TAXATION AVOIDANCE AGREEMENTS
There are many double taxation avoidance agreements (DTAAs) between India and other nations. DTAAs are agreements between two countries intended to prevent double-income taxation. Netflix may be eligible for a credit for taxes paid in the US under the DTAA between India and the US if it is taxed in India. As a result, Netflix’s tax obligations in India would be reduced. In the assessment year 2021–2022, the tax authorities assigned Netflix’s Indian permanent establishment (PE) an income of around 550 million rupees ($6.73 million), according to the report.[5] According to the publication, tax officials reasoned that the American company had certain staff members and infrastructure from the parent organisation on secondment in India to support its streaming services, resulting in a PE and tax liability.
NETFLIX MEMBERSHIP SALES TAX
Netflix membership may be subject to sales tax in some states (governed by your state’s sales tax laws) because your membership includes streaming and games. Tax rates can differ by city, state, region, and nation and are determined by the rate that was in effect when you charged your Netflix account. As local tax laws change, these sums may also alter. Sales tax is not included in the listed price for Netflix. Your monthly invoice includes a separate line for any applicable sales tax. It is important to note that in some Indian states (Maharashtra, Karnataka, Gujarat, Tamil Nadu, West Bengal Andhra Pradesh, Telangana and Kerala) with state sales tax legislation, Netflix subscriptions may be subject to sales tax.
CONCLUSION
Digital streaming services like Netflix are taxed in India, a complex and developing topic. Tax authorities and legislators must address the issues and create efficient tax systems that promote justice, transparency, and revenue production as the digital economy expands. Tax authorities must adopt cutting-edge strategies and change tax laws to reflect the digital environment. This might entail reframing the idea of a permanent institution, investigating different methods for allocating profits and creating regulations that link profit attribution to value creation. Additionally, it is essential to coordinate and harmonise international activities to level the playing field, prevent double taxation, and simplify regulatory requirements.
Author(s) Name: Navaneeth P. Nair (Indian Institute of Management Rohtak)
[1] Raghavi Bhora ‘Impact of OTT on traditional mode of entertainment’ (The Times of India, 30 November 2021) <https://timesofindia.indiatimes.com/readersblog/raghavi/impact-of-ott-on-traditional-mode-of-entertainment-39292/> accessed 28 May 2023
[2] The Income-Tax Act 1961
[3] The Income Tax Act 1961, s 139
[4] ‘Permanent Establishment (PE) in India’ (India Law Offices LLP) <https://www.indialawoffices.com/knowledge-centre/permanent-establishment%20-pe-in india#:~:text=A%20foreign%20enterprise%20would%20be,%2C%20workshop%2C%20warehouse%20etc.%20or> accessed 26 May 2023
[5] ‘Income Tax Department Seeks To Tax Netflix’s Earnings In India: Report’ (Outlook, 12 May 2023) <https://www.outlookindia.com/business/income-tax-department-seeks-to-tax-netflix-s-earnings-in-india-report-news-285631> accessed 29 May 2023
