The retail sector is a major contributor to the growth of Singapore's economy but the rise of e-commerce, dominated by overseas retailers, has resulted in money flowing out of the country.
As many online retailers are located outside of Singapore, the products and services escape our domestic Goods and Services Tax (GST), and often the goods are brought here without any import GST being due.
Figures from the Inland Revenue Authority of Singapore (Iras) show that the collection of GST here in the financial year ended March 31, 2016 amounted to $10.3 billion. This represents a modest increase of $0.1 billion from the financial year ended March 31, 2015.
This could be explained in part by the weaker-than-hoped-for domestic and tourist spending, but it is also likely that the modest increase could be due to the growth in cross-border online transactions.
Singapore has not raised the standard rate of GST since 2007 and given the many uncertainties, it is unlikely the Government will raise it soon.
Therefore, if the Government needs to increase GST to increase revenues, the immediate solution more likely lies in expanding the scope of the tax.
An area to be considered is taxation of digital services bought from overseas providers.
GST under its current scope is imposed on only domestic taxable supplies of goods and services made by someone registered for the tax.
If a local business or consumer purchases digital services from a provider overseas, typically, no GST will be charged.
Singapore also offers import GST relief for the import of most goods, subject to a cap on the value at importation of $400.
This means if you purchase low-value goods online and arrange for the goods to be shipped to you via courier, no import GST will be payable.
CONTRAST
The above stands in contrast to a situation where you buy digital services or low-value goods from a provider here, where GST would be charged if the provider was registered for the tax.
In recent years, the rapid development of digital economy has resulted in the Organisation for Economic Co-operation and Development calling for countries to standardise how they tax cross-border supplies.
This is a growing concern for Singapore as not only is there a leakage in GST revenue, it has created an uneven playing field between domestic GST-registered suppliers and overseas suppliers who are not registered for GST.
It has also presented incentives to taxpayers to structure their business arrangements by shifting offshore to take advantage of this uneven playing field.
By doing so, it could also mean more job losses in the domestic retail industry.
Countries such as Japan, South Korea and New Zealand have already implemented taxation for the digital economy.
In an advanced economy like Singapore's, the amount of tax to be collected from the digital economy could be significant.
Imagine the entire 5.6 million population spent $100 each annually on imported digital services and low-value goods, this would result in an additional annual GST revenue of about $39 million.
This increase could also be a boost for local retailers, as buyers move their spending back to the domestic economy as there is no longer as great a financial incentive to buy from overseas.
During the build-up to the 2016 annual budget, there was speculation Singapore might announce the imposition of GST on cross-border digital transactions and low-value imports.
It did not happen. The Government has so far adopted a "wait and see" approach as there are many factors to be considered, which may include deciding on the most efficient tax collection method.
For example, whether to subject business-to-consumer (B2C) digital services to GST and exclude business-to-business (B2B) ones, since businesses registered for GST are usually able to recover the GST incurred as an input tax credit.
The Government will also need to consider whether to include all B2C digital services or only defined services and, if the latter, which should be covered.
Finally, we would expect Iras will want to estimate costs involved in the administration of the requirements vis-a-vis the tax revenue to be collected to determine whether the benefit outweighs the additional effort.
If it is concluded that the most efficient collection method is to require overseas suppliers to register for GST here and for them to charge, collect and account for the tax via the filing of a local GST return to Iras, Iras will need to determine the GST registration threshold and registration process, and how to communicate the new requirements to overseas suppliers and "encourage" those affected to comply with them.
It remains to be seen whether the Government will expand the scope of GST and introduce the taxation on the import of digital services and low-value goods.
If this happens, it will be the online shoppers here who will bear the cost as their favourite websites get a bit more pricey.
Richard Mackender is a tax partner and the indirect tax leader at Deloitte Singapore and Danny Koh is a tax partner at Deloitte Singapore. This commentary appeared in The Business Times yesterday.
As many online retailers are located outside of Singapore, the products and services escape our domestic Goods and Services Tax (GST), and often the goods are brought here without any import GST being due.
Figures from the Inland Revenue Authority of Singapore (Iras) show that the collection of GST here in the financial year ended March 31, 2016 amounted to $10.3 billion. This represents a modest increase of $0.1 billion from the financial year ended March 31, 2015.
This could be explained in part by the weaker-than-hoped-for domestic and tourist spending, but it is also likely that the modest increase could be due to the growth in cross-border online transactions.
Singapore has not raised the standard rate of GST since 2007 and given the many uncertainties, it is unlikely the Government will raise it soon.
Therefore, if the Government needs to increase GST to increase revenues, the immediate solution more likely lies in expanding the scope of the tax.
An area to be considered is taxation of digital services bought from overseas providers.
GST under its current scope is imposed on only domestic taxable supplies of goods and services made by someone registered for the tax.
If a local business or consumer purchases digital services from a provider overseas, typically, no GST will be charged.
Singapore also offers import GST relief for the import of most goods, subject to a cap on the value at importation of $400.
This means if you purchase low-value goods online and arrange for the goods to be shipped to you via courier, no import GST will be payable.
CONTRAST
The above stands in contrast to a situation where you buy digital services or low-value goods from a provider here, where GST would be charged if the provider was registered for the tax.
In recent years, the rapid development of digital economy has resulted in the Organisation for Economic Co-operation and Development calling for countries to standardise how they tax cross-border supplies.
This is a growing concern for Singapore as not only is there a leakage in GST revenue, it has created an uneven playing field between domestic GST-registered suppliers and overseas suppliers who are not registered for GST.
It has also presented incentives to taxpayers to structure their business arrangements by shifting offshore to take advantage of this uneven playing field.
By doing so, it could also mean more job losses in the domestic retail industry.
Countries such as Japan, South Korea and New Zealand have already implemented taxation for the digital economy.
In an advanced economy like Singapore's, the amount of tax to be collected from the digital economy could be significant.
Imagine the entire 5.6 million population spent $100 each annually on imported digital services and low-value goods, this would result in an additional annual GST revenue of about $39 million.
This increase could also be a boost for local retailers, as buyers move their spending back to the domestic economy as there is no longer as great a financial incentive to buy from overseas.
During the build-up to the 2016 annual budget, there was speculation Singapore might announce the imposition of GST on cross-border digital transactions and low-value imports.
It did not happen. The Government has so far adopted a "wait and see" approach as there are many factors to be considered, which may include deciding on the most efficient tax collection method.
For example, whether to subject business-to-consumer (B2C) digital services to GST and exclude business-to-business (B2B) ones, since businesses registered for GST are usually able to recover the GST incurred as an input tax credit.
The Government will also need to consider whether to include all B2C digital services or only defined services and, if the latter, which should be covered.
Finally, we would expect Iras will want to estimate costs involved in the administration of the requirements vis-a-vis the tax revenue to be collected to determine whether the benefit outweighs the additional effort.
If it is concluded that the most efficient collection method is to require overseas suppliers to register for GST here and for them to charge, collect and account for the tax via the filing of a local GST return to Iras, Iras will need to determine the GST registration threshold and registration process, and how to communicate the new requirements to overseas suppliers and "encourage" those affected to comply with them.
It remains to be seen whether the Government will expand the scope of GST and introduce the taxation on the import of digital services and low-value goods.
If this happens, it will be the online shoppers here who will bear the cost as their favourite websites get a bit more pricey.
Richard Mackender is a tax partner and the indirect tax leader at Deloitte Singapore and Danny Koh is a tax partner at Deloitte Singapore. This commentary appeared in The Business Times yesterday.
