What a 2% VAT hike will mean for car prices in South Africa

Leaked versions of the now-postponed 2025 Budget Speech showed that government was planning on raising Value-Added Tax (VAT) from 15% to 17% this year.

VAT is a vital tool for padding the country’s fiscus, a necessary evil one might say.

According to the South African Revenue Services, it is an “indirect tax on the consumption of goods and services in the economy.”

It’s a large revenue generator for government and, in turn, is spent on service delivery, infrastructure development, and much more.

There is a limited range of goods and services subject to VAT, one of which is vehicles. The charge is paid on every car purchased in the country, bar models like single-cab bakkies in certain cases.

Any change to VAT will therefore have an impact on vehicle prices, and a knock-on effect on the auto industry as a whole.

TopAuto spoke with the National Automobile Dealers’ Association (Nada) to get more insight on the potential consequences of a 2% VAT hike for the automotive sector.

Nada is the voice of business persons who own, operate, and manage new passenger and commercial vehicle franchise motor dealerships and qualifying used vehicle outlets in South Africa.

The entity stated that it believes the proposed 2% increase in VAT is no longer an option but at a point in the future it may become so, even if it is by 1% at a time.

As VAT is a consumption tax, each 1% increase is estimated to generate around R40 billion per annum.

“However, in a stagnant economy where consumers are already under severe financial strain, a broad and immediate price increase across all goods and services will have a widespread impact, with certain purchases, such as vehicles, being particularly affected,” said Nada.

“The rise in VAT will further erode disposable income, which is already stretched due to increasing costs of essential services such as rent, water, electricity, and food.”

With less available income, consumers may be forced to delay or reconsider big-ticket purchases such as a new set of wheels.

Dealers’ bottom lines will be negatively affected as a result, and downstream industries such as finance, insurance, servicing, as well as parts supply will be impacted.

Impact on car prices

A VAT increase of any sort is all but certain to have a direct impact on car prices.

For a more practical example, let’s look at how the prices of the Suzuki Swift, the country’s best-selling car in February, could look after a 2% VAT hike.

There are several taxes paid when a new car is sold, which can be classified as:

• Value Added Tax (VAT) – 15%
• Ad Valorem Tax – Calculated on a per-vehicle basis
• CO2 emissions tax – 2.5-6%
• Import duty on new vehicles – 25%

Based on this calculation, the VAT applicable on a Swift is anywhere from R28,683 to R37,161, depending on whether you buy the base GL or the top-spec GLX Auto.

Should the tax be increased by two percentage points, these figures will rise to R32,507 and R42,116, respetively.

As a result, this is what the Swift’s pricing could look like should the proposed VAT hike come into effect:

This shows that the suggested VAT adjustment could add anywhere between R3,824 and R4,955 to the price of the sought-after Swift.

Now Suzuki can decide to absorb these increases and keep the selling prices unaffected by lowering its profit margins, which won’t have a bearing on your upfront spend.

However, referring back to what Nada said, motorists will still be plagued with higher running costs over the course of ownership as parts and service prices will rise with VAT.

Insurance is likely to go up as well, as a portion of the premium is based on what it will cost to repair the insured vehicle, which, of course, depends on component and workshop fees.

Should these rise as a result of higher VAT, so, too, could insurance premiums.