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Consumers might spend less with impending digital services tax

GST on digital services will likely dampen growth of the sector but not constrain it, with consumers waiting for promotions

Finance Minister Heng Swee Keat on Monday announced the imposition of the goods and services tax (GST) on digital services like ride-sharing, food ordering and video on-demand providers from 2020.

Broadening the tax base to include digital service providers should bring added resilience to the digital business ecosystem over the long term.

Both digital service providers and consumers will be affected. Service providers will face raised operational costs for compliance with the new tax regime and will need to ramp up to handle GST reconciliation once they cross the $100,000 revenue threshold.

Coupled with the proposed rise in GST to 9 per cent across all businesses from 2021, this hits providers based both in and outside of Singapore with additional margin pressures.

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 or credit card companies to deliver greater incentives.

Providers will most likely also proactively lobby for progressive tax structures to soften the impact. 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 the US, Britain and China, music and video apps ranked as the sixth and seventh most used smartphone apps.

In our mature market, 59 per cent of all Singaporeans have reported purchasing a product or service online. Business-to-consumer (B2C) apps like Grab, Uber and Spotify have the most monthly active users.

SHIFT

When the tax is implemented, consumers will look to shift towards foreign-based B2C service providers that do not make more than $100,000 in the sale of digital services to people here, to save on the GST.

Where there is no replacement service, consumers might reduce purchases and/or switch to lower-value purchases.

Based on Gartner's consumer personas, savvy enthusiast (24 per cent of users) consumers are expected to seek other digital providers to provide similar or comparable services.

Consumers will also plan their online purchases when a promotion occurs.

The introduction of this tax will dampen the growth of digital services in Singapore but should not constrain it.

Innovative service providers will take this in their stride. They will aim towards gaining market share though unique and rich user experiences.

And consumers will not stop buying online - they will simply spend more wisely.

Digital commerce service providers should be prepared as innovative physical retailers are already in digital commerce. They are differentiating though a unified retail experience across multiple channels - for example Sephora.

Taxing pure players in digital commerce (such as 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.

Physical retailers should implement digital transformation to respond to new retail models such as the unmanned store pilots from Alibaba.

The writer is research director at Gartner, a research and advisory company.

BUSINESS & FINANCE