GST on digital services may herald end of tax-free shopping

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                              (Commentary Today Tuesday 27 February 2018)

        GST on digital services may herald end of tax-free shopping

By Koh Soo How and Lin Weijie

Workers checking on customers' orders at an Amazon fulfilment centre in Britain. The authors say

that with the rapid growth of e-commence globally and Singaporeans’ gravitation towards shopping

online (and offshore) in recent years, it was only a matter of time before overseas digital services come

under the scope of taxation. Photo: Reuters

Updated 27 February, 2018

A 2016 report by PwC found that 60 per cent of consumers in Singapore buy products online both locally and overseas at least once a month.

The most popular overseas online purchase was clothing and footwear at 58 per cent while books, music, movies and video games came in second at 40 per cent. And it is the latter category of digital products that Budget 2018 zoomed in.

Come January 2020, consumers of music and video streaming services, digital downloads, online subscriptions and the like from offshore vendors would have to pay Goods and Services Tax (GST) on such imported “digital services”.

This brings Sinapore in line with international developments and may be the most monumental change to the scope of the GST since its inception in 1994.

Offshore vendors with an annual global turnover exceeding S$1 million and making supplies of digital services to customers in Singapore exceeding S$100,000 in a calendar year will now be required to be registered for GST and to account for the tax on such transactions. Purchases from electronic marketplaces (such as app stores) are also not spared.

While the number of offshore service providers impacted by this change is not expected to be significant, the present state of the e-services market - which is largely dominated by a few prominent players in their respective services domain – means that it is very likely that most (if not all) of the popular digital services consumed here in Singapore today will be subject to GST in two years’ time. It is likely that the prices of digital services would go up, but is too early to tell if the introduction of the GST would dampen demand for such services.

The more popular services are now so ingrained in our daily lives - from hailing a ride to catching up on the latest Korean drama series on the go – they have virtually become a daily necessity (or fix) for many. It is hard to see Singaporean consumers steering away from such services just because of the GST.

Key to the successful implementation of the GST would be the compliance of offshore digital vendors with registration requirements as well as the remittance of taxes collected to the authorities here.

Obviously, the issue of enforceability comes to mind and the Government would have no doubt considered this at length and taken preemptive steps to reach out to the more prominent players already.

As it stands, exchange of information arrangements between tax authorities globally mean that the Inland Revenue Authority of Singapore (“IRAS”) is able to identify overseas vendors which need to be registered under the expanded GST regime.

The big boys would therefore know that it is hard for them to stay off the radar. Accordingly, they would most likely have engaged the authorities upfront to provide feedback and have a say in the shaping of the rules as a stakeholder.

Despite this, it would be unrealistic to assume that the rule would be fully complied with. After all, it would be very difficult (and almost impossible) for IRAS to keep tabs on every single offshore vendor which meets the stipulated registration criteria.

In this regard, the Government is likely to take a pragmatic and practical approach on this by applying the Pareto principle (or the 80:20 rule).

Simply put, if the top 20 overseas service providers can account for 80 per cent of the market for digital services, the Government would have achieved its objective by getting some parity in tax treatment and new revenue from these 20 service providers.

IRAS has also published a draft circular explaining the application of the new rules and is now seeking public feedback.

While the authorities have provided a somewhat broad definition of what constitutes “digital services” and examples of what is in-scope or otherwise, the onus is still on digital vendors (and not the consumers) to seek clarification from IRAS should there be any doubt.

The public consultation exercise (which will end March 20) would hopefully provide further clarity in terms of the scope and operational rules.

With the rapid growth of e-commence globally and Singaporeans’ gravitation towards shopping online (and offshore) in recent years, it was only a matter of time before overseas digital services come under the scope of taxation.

In all fairness, our collective shopping preferences may have inadvertently contributed to this development, and it is now time for us to face (and pay for) the music.

If it is of any consolation, purchases of goods from overseas vendors are still GST-free for now (so long as it is under the S$400 threshold). Finance Minister Heng Swee Keat has indicated that further review is needed to decide the best way to tax such transactions.

Sooner or later, and as with most things in life, consumers will come to accept the fact that GST-free shopping may soon be a thing of the past.

ABOUT THE AUTHORS:

Koh Soo How is the Asia Pacific Indirect Tax leader and Lin Weijie is senior manager of Indirect Tax at PwC Singapore.