True cost of taxing digital services

A commuter using his mobile phone at Bishan MRT station, on Feb 23, 2017.
A commuter using his mobile phone at Bishan MRT station, on Feb 23, 2017. PHOTO: ST FILE

Goods and services tax (GST) allocation plays a vital role in Singapore's economy, such that a higher tax revenue produces an increased opportunity in narrowing the gap between spending, saving and borrowing for infrastructure of the country.

GST has constantly been maintained at the rate of 7 per cent since 2007. However, a predicted GST hike to 9 per cent is likely to take effect between 2021 and 2025.

One of the most recent additions planned was to impose a tax on digital services, such as Netflix, from next year (Bill passed to tax overseas services like Netflix from 2020, Nov 20, 2018).

Statistics show that Singapore imported almost $225 billion worth of services in 2016.

Hence, the Government decided to impose a tax on digital services provided by overseas vendors, such as video streaming, online subscription fees, listing fees on electronic marketplaces and software and mobile apps.

With GST being a tax on final consumption, there is no doubt that the tax increase will be passed on to consumers, resulting in higher prices for the products or services.

Furthermore, it might result in a challenge for digital service business providers to remain profitable, as there will be additional margin pressures with the proposed increase in GST.

On the other hand, demand elasticity will affect consumers' decision-making.

Consumers are more likely to choose other available substitutes, such as illegal alternatives, or spend more wisely by reducing consumption on services or products that they can live without.

This, in turn, may lead to a decrease in the consumption component of the gross domestic product equation and, therefore, tax revenue may end up lower than the estimated amount.

Wilda Willian Ong

A version of this article appeared in the print edition of The Straits Times on May 18, 2019, with the headline 'True cost of taxing digital services'. Print Edition | Subscribe