Netflix. Uber. Spotify. Consider yourselves warned.
During the Budget statement on 19th February, Singapore’s Finance Minister Heng Swee Keat announced that there will be a GST (Goods and Services Tax) imposed on digital services such as ride-sharing, food ordering, ticket sales, and video on-demand providers from 2020.
Broadening the tax base to include digital services to add resilience to the digital economy over the long term. Whether the e-tax is ‘fair’ can only be ascertained, as and when, these new GST ruling supports or disrupts local startups in creating new digital work forces. I think this is a positive sign from the Singapore government that digital businesses are given notice until 1 January 2020 to prepare for this.
So, on whom and how will this tax impact?
Digital Service Providers
Digital service providers will face increased operational costs for compliance with the new e-tax regime and hence will need to ramp up to handle GST reconciliation with IRAS once they cross the $100,000 revenue threshold. Coupled with the proposed increase in GST to 9% across all businesses from 2021, this hits providers domiciled both in and outside of Singapore with additional margin pressures, as they strive to remain profitable.
In order to reduce the impact, service providers will most likely offer their own ‘amnesty’ for a period to high value customers to mitigate the impact. They may also focus on partnerships with digital payment providers/credit card companies to deliver greater incentives against spend. Providers will most likely also proactively lobby for progressive tax structures to soften the impact, based on revenues earned. However, this should not trigger any sort of a price war between competitive services as it applies across the board.
In Gartner’s 2017 Mobile Apps Survey conducted across US, UK and China; music and video apps ranked as the 6th and 7th most used smartphone apps. Similarly in our mature market, 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.
When the tax is implemented, consumers will shift to foreign-based B2C digital service providers that do not make more than $100,000 in the sale of digital services to consumers in Singapore once this is implemented, to save on the GST. Where there are no viable replacement digital services, i.e. Grab or Uber for Singapore transport, consumers might reduce purchases and/or switch to lower-value purchases.
As the internet is porous and border-less by nature, the new tax will alter users’ consumption habits. We cannot expect consumers to remain loyal as digital service providers survive on the user experience they provide.
Based on Gartner’s consumer personas, I expect savvy Enthusiast (24% of users) consumers to seek other digital providers to provide similar or comparable services. For non-urgent needs, consumers will plan their online purchases for when a suitable promotion or campaign occurs. Technology Late Adopters (20% of users) will be held back by price, as one of the top barriers for consuming a digital service.
The introduction of this tax will dampen the growth of digital services in Singapore but should not constrain it, as we know consumers are progressively digitise their services. Innovative, forward-thinking service providers will take this in their stride as a matter of doing business in Singapore. They aim squarely at differentiating and gaining market share though unique and rich user experiences. In the same breath, consumers will not stop buying online – they will simply choose to spend more wisely and prudently.
Hang on, so what about digital commerce providers?
While the new tax measure does not affect digital commerce for now, I expect this to be announced soon. Digital commerce service providers will need to stand prepared, as innovative, forward-thinking physical retailers are already in digital commerce. These retailers are differentiating though a unified retail experience for consumers across multiple channels – with examples from Uniqlo, Sephora and Nike. Taxing pure players in digital commerce (like Alibaba, 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.
By 2018, physical retailers should already be implementing or harvesting from digital transformation projects; 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.
NB: Singapore is not the first country to implement a digital commerce tax. Australia and New Zealand have both implemented the same in recent years. The European Commission is proposing a ‘Digital Single Market‘ to address inequities between digital and traditional retailers.