Netflix and bill: the GST on digital services to hit consumers

Customers to be hit in the hip pocket as digital services like Uber and Spotify will be taxed from 2020.

Digital firms will carry double burdens of lower profits and dampened online shopping due to the GST that will be imposed on digital services starting 2020, research firm Gartner said. According to the report, Singapore customers might reduce or look for lower-value purchases, as more of them are shifting towards foreign-based business to customer (B2C) digital service providers. About 59% of all Singaporeans have reported purchasing a product or service online. B2C apps like Grab, Uber and Spotify occupy the top 10 spots with the most monthly active users.

In Gartner’s 2017 Mobile Apps Survey conducted across the US, UK, and China, music and video apps ranked as the 6th and 7th most used smartphone apps. Where there is no viable replacement service, consumers could become thriftier.

"I do not think consumers will stop buying online. They will simply choose to spend more prudently," Gartner research director Adrian Lee said. Moreover, digital service providers will face increased operational costs for compliance with the new tax regime. Service providers will need to ramp up to handle GST reconciliation with IRAS once they cross the $100,000 threshold.

"Coupled with the proposed increase in GST (Goods and Services Tax) to 9% across all businesses from 2021, this hits the digital service providers domiciled both in and outside of Singapore with additional margin pressures as they strive to remain profitable," he added.

"Needless to say, this will dampen the growth of digital services in Singapore but should not constrain it, as consumers progressively digitise their services," he added. Lee argued that it is a positive move from the government that digital businesses are notified of the possible year of implementation to prepare for the hike.

Yeo Kai Eng, Partner, Indirect Tax Services Leader, Ernst & Young Solutions LLP said the budget was good news for all – the much anticipated e-commerce tax (GST) on importation of low value goods was not announced. "This means that end-consumers can continue to shop online without GST, at least for now.”

Budget 2018 may have introduced the digital services tax, but physical goods online retailers need to be prepared for a likely e-commerce tax.

"I am expecting this to be announced in due course. Digital commerce service providers need to stand prepared. Innovative, forward-thinking physical retailers are already in digital commerce. These retailers are differentiating though a unified retail experience for consumers - with solid examples from Uniqlo, Sephora and Nike. Taxing pure players in digital commerce (like Shopee, Qoo10, Lazada, or Amazon) signals to traditional retailers that it is acceptable to do ‘business as usual’ in a declining physical retail market. Something needs to click for traditional retailers who insist on brick-and-mortar only. The tax might diversify the base, but on its own cannot sufficiently stimulate physical retail. In 2018, physical retailers should already be implementing/harvesting digital transformation; so as to respond to new retail models such as the unmanned store pilots from Alibaba, user-selectable delivery slots from Amazon Prime or digital wallets from GrabPay.