Taxability of ‘free’ supplies in the privacy/ information framework

 The Supreme Court in the landmark judgment of Puttaswamy recognized that right to privacy is a fundamental right, the notions of which amplified in the Aadhar case. This followed up with the tabling of Personal Data Protection Bill, 2019 (PDPB) before the Parliament. But after the criticism and its inadequacies, the PDPB has recently been withdrawn, with reported placement of a new draft in due course. All things said and done, the privacy framework is not only going to shake up the internet traffic, but depending upon how its worded may leave its marks on the tax laws as well. In this backdrop, the present piece discourses the potential taxability of information collected by the service providers.

Upliftment of Information: The technology has led data driven revenue models, the services providers can offer products to the consumers free of cost, in return for just their ‘information’. The information so collected is either self-penetrated to increase market of other offerings or it is sold to someone else for profit. The Puttaswamy judgment has uplifted ‘informational privacy’ (one’s personal traits) beyond what could be said as ‘mere information’ almost to the extent of fitting into the description of ‘consideration’ in some cases. If a service provider provides messaging services and captures consumer’s mobile number, his email, his preferences, etc. and also takes his assent to allow the service provider to market the same or use the same for targeted delivery, it could fit into the description of supply for non-monetary consideration and be exigible to GST. While the idea is definitely there, it just needs to be tested on some of the other planks of taxability.

 

 

Gauging consideration: First and foremost, its relevant to comprehend in which cases the information collected can be considered as ‘consideration’. Consideration in essence is something which “accrues to the benefit of the supplier” [Ku. Sonia Bhatia AIR vs State of UP], further it should flow at the desire of the promisor [CST vs Repco Home Finance Ltd.]. ‘W’ provides messaging services on ‘free to use’ basis, subject to users assenting to share the required information with W and allow W to use such information (route it to ‘F’ or otherwise). W therefore values ‘the information’ and also it flows to him from the user at his desire. This scenario is therefore susceptible to taxability, despite the fact that services may facially look free.

 

 

Merchantability of information: Merely because information is collected does not itself make it valuable. If a consumer buys car from a dealer and share his mobile number (for regulatory or communication purpose), it shouldn’t mean that mobile number is something of value to the dealer in the sense of

consideration. The ‘information’ should be something of value, that the collector can either self-use (e.g. for targeted delivery) or it should be sellable. Information collected in the routine course or as part of regulatory framework may seldom pass this blockade, which shows that the while the controversy may be there but may not be scalable.

 

 

Fiat ruling: In context of Excise law, the Supreme Court reached a conclusion that ‘market penetration’ is a consideration (in kind) for sale of goods. The effect of this ruling under the excise law was undone by an amendment in the excise valuation rules which made it an exception to the transaction value. Under GST, no exception exists either under the CGST Act or the rules. Therefore, the analogy of this ruling may fuel the case of revenue that penetrative-information resembles market penetration and thereby reaches the threshold of consideration. The sooner this ruling is undone/ distinguished by the legislature/ judiciary, the better.

 

 

Proportionality Test/ Information-extra: The proportionality doctrine was applied by DY Chandrachud

J. in Aadhar case to draw a line between the ‘information-required’ and ‘information-extra’ whenever a consumer requests for product from the supplier. This test might also be relevant while determining when the information-collected transgress the point of ‘information-required’ and reaches the threshold of consideration (information-extra). Drawing this line could be very subjective and difficult, as the ld. Judge pointed out. The author of the book "The Right To Privacy: Arguing For The People" has commented on the policy of an aggregator, that the information sought (and collected) is beyond the information-required for the purpose of providing the services. Assuming that the information-collected is used for user-profiling or sold, it could be possible to argue that services of the aggregator are not free in economic sense, and may warrant GST scrutiny.

 

 

Valuation: The next crucial aspect is valuation of the information, if the valuation of information cannot be done, the services/ goods supplied against such information cannot be taxed [Govind Saran Ganga Saran vs CST]. It’s perhaps possible to value the services provided to consumer, where the information so collected is further sold. However, if the information sold is not ‘as-is’, but processed information, the link is broken and it becomes difficult to value the services-for-information collected. The benchmarking valuation rule (Rule 27) also fails, because appropriate benchmarking may not be available in this nascent sphere. The resort to costing-based valuation is not tested and has complications of its own.

Further, where the information is not sold but consumed, then it’s even more very difficult to value it. The implicit value of the information gets militated into the product offering of the organizations and generally does not appear on the financial records. The only visibility to capture value is if somehow it can be specifically benchmarked to some specific benefit (whose value is in turn known). For example, a subscriber referring information about his friend and in turn getting one-month free subscription from Disney+. Overall, therefore in majority of the cases, the taxability might fail for lack of appropriate valuation formulae.

 

 

Conclusion: From the GST perspective, clearly the parent legislation is wide enough to encapsulate the free supplies offered in return for information, however, owing to pitfalls of rules and the threshold that the revenue authorities would have to reach, may make the discussion interesting. The revised PDP law and judgments from the Courts may bring more clarity on how the information should be perceived, which in turn should help the discussion under the tax law.