This article was contributed to and first published in TODAY on 23 February 2021.
Most avid online shoppers would know that no Goods and Services Tax (GST) is payable when the goods are shipped by air or post to Singapore as long as the value does not exceed S$400 (also known as low-value goods).The GST saved may even be enough to add another gadget into that shopping cart.
In the recent Budget statement, Deputy Prime Minister Heng Swee Keat announced that this GST relief for imported low-value goods will soon come to an end.Come Jan 1, 2023, consumers will have to pay GST on goods imported into Singapore via air or post regardless of value.
Singapore is not the first to implement such rules. Countries such as Australia, New Zealand and the United Kingdom have already introduced similar measures to tax low-value goods in recent years.
This development is not an unexpected one — the writing has been on the wall ever since the 2018 Singapore Budget where the Government indicated that it was studying how GST can apply on low-value imported goods.
The 2021 announcement follows the introduction of GST on business-to-consumer (B2C) digital services such as video and music streaming services procured from abroad with effect from Jan 1, 2020.Mr Heng also announced that B2C services procured from abroad which are non-digital in nature will also be subject to GST come Jan 1, 2023.
Currently, goods imported via land or sea are already taxed, regardless of its value.
This essentially means that when the new rules come into effect, consumers pay GST regardless whether the purchase is made from local GST-registered suppliers or from abroad — addressing a longstanding need for parity in GST treatment between local and offshore purchases.
Singapore’s GST system was designed for a brick and mortar economy where the supplier and consumer are both located in the same country, and online purchases were not prevalent at that time.
But that was close to 30 years ago. Since then, consumer spending habits have gravitated towards online shopping and for a long time, we have not had any mechanism to tax such purchases from offshore vendors.
With the upcoming changes, the GST system will soon be equipped to plug the tax leakages brought forth by the digital economy.
At the moment, it is unclear exactly how much the introduction of GST on low-value goods will add to government coffers annually.
Back in 2018, the Government estimated that the introduction of GST on imported services would bring in S$90 million in tax revenues a year.
With the digital economy growing at a rapid pace, coupled with the GST rate hike due to kick in within the next few years, it is clear that GST contributions arising from the digital economy will grow in significance in the longer term.
It is likely that the prices will go up, but it is too early to tell if the introduction of the GST will dampen demand for online purchases from abroad.
After all, price is just one of the many factors in the purchasing decision and not all goods are available for retail locally.
Inertia also comes into play here. Once consumers get used to and are familiar with shopping on their favorite online offshore marketplaces, it is unlikely that this development will cause spending habits to shift significantly to buying from retailers locally.
For consumers who take joy in comparing prices and bargain hunting, the task may become slightly more complex.
Depending on the details of the implementation rules and how an offshore vendor’s system is configured, the GST-inclusive price may be computed only at the point of checkout and hence the initial price displayed may not be the final price.
Affected offshore businesses will be required to register for GST in Singapore and to charge GST on the sale of low-value goods to be imported into Singapore.
While details of the new rules have yet to be announced, we expect businesses such as offshore online marketplaces and parcel forwarding firms popular with Singapore consumers will be required to register for GST in Singapore in preparation of the new rules coming into effect from Jan 1, 2023.
For consistency, the GST registration threshold for imported low-value goods is likely to be the same as that prescribed under the GST rules for B2C digital services provided by offshore vendors — that is, businesses with a global turnover exceeding S$1million and sales to Singapore consumers exceeding S$100,000.
This makes sense since such businesses are well placed to collect the tax in view of their role in the supply chain and would be sophisticated enough to manage the compliance obligations given their scale of operations.
Affected offshore businesses should also be relatively familiar with the new rules given that similar rules have been implemented in several other countries.
Nevertheless, systems and process changes will need to be made.
Businesses (after they are GST-registered) would need to configure their systems to take into account additional data points as GST is applicable only if the buyer is a Singapore non-GST registered consumer, the mode of shipment is via air or post, the value of the goods does not exceed S$400 and the product is shipped from abroad.
We may also see merchants who are currently selling directly to Singapore consumers changing their distribution model to sell via marketplaces in an attempt to have GST compliance obligations passed on to the marketplaces (which are usually larger and better positioned to do so) to manage such obligations.
Taking reference from the rules around GST for digital services which were introduced in 2020, we can get a sense of what it could be like when GST is introduced for imported low-value goods.
Back in December 2019, the Inland Revenue Authority of Singapore (Iras) announced that more than 100 offshore businesses had registered for GST under the digital services rules. For GST on imported low-value goods, we can expect this number to be greater.
This is because unlike the market for digital services, the state of the e-commerce market for goods is more fragmented.
There are simply more offshore retailers peddling goods online as compared to digital services, and that excludes marketplaces.
For online offshore retailers that are not expected to exceed the registration threshold, it is hard to see them voluntarily putting their name forward and registering for GST.
Under the proposed registration regime for offshore vendors of low-value goods, this is likely to be a “pay only” system (similar to that for offshore digital services providers).
Businesses registered under such a system are merely tax collecting agents for the Government.
Unlike local GST registered businesses, these overseas vendors will not be allowed to claim the GST incurred on their expenses.
So they will have to bear the burden of compliance, which would impact prices and their bottom lines.
As with the implementation of any tax, the issue of enforceability comes to mind.
Iras should largely be able to identify offshore businesses which need to be registered under the new rules since they have existing arrangements with other tax authorities to exchange such information.
Despite this, it would be unrealistic to assume that the rule would be fully complied with.
In this regard, the Government is likely to focus its outreach and enforcement efforts based on the Pareto principle (or the 80:20 rule).
Simply put, if efforts focused on 20 per cent of the target group results in collections accounting for 80 per cent of total potential collections, it would have been an effective outcome.
In any case, we can expect to pay GST on most (if not all) of our purchases of low-value goods from abroad in time to come.
We often take things for granted until they are gone for good, and we need to accept that GST-free shopping will be a thing of the past.
ABOUT THE AUTHORS: Kor Bing Keong is the Goods and Services Tax (GST) leader and Lin Weijie is senior manager specialising in GST at PwC Singapore.