Car tax disaster in South Africa

Ad Valorem Luxury Tax (AVLT) on new vehicles in South Africa hasn’t been changed in nearly 30 years, therefore making cars more expensive than they have to be.

At present, there are four main taxes levied on new vehicles imported to South Africa:

• Value Added Tax (VAT) – 15%
• Ad Valorem Luxury Tax – Calculated on a per-vehicle basis, capped at 30%
• CO2 emissions tax – 2.5%-6%
• Import duties – 25% (18% if imported from EU)

AVLT is described as a luxury excise tax that exponentially increases with the price of the vehicle. It is an additional revenue stream for government derived from the sale of goods that are deemed luxuries rather than necessities, and levels the playing field between low and high-income individuals as the latter generally pays more.

Greg Cress, Africa Principal Director of Automotive and eMobility at Accenture, explains that AVLT was introduced approximately three decades ago when the car market looked much different.

Back in those days, a BMW 320i sold for the sum of R106,590. Today, the equivalent nameplate goes for a heady R913,731.

However, AVLT hasn’t evolved to accommodate this transformation in the industry and is therefore putting unnecessary pressure on buyers at the lower end of the price spectrum.

As per Naamsa The Automotive Business Council, the formula for AVLT is {(0.00003 x A) – 0.75}%. In this equation, “A” means the recommended retail price, exclusive of value-added tax, less 20%.

As such, the effective AVLT for a vehicle with a recommended retail price of R900,000 is 17.826%, said Naamsa.

For a car that sells for R200,000, the AVLT will be closer to 3.42%.

To put this into perspective, if you were to buy a Suzuki S-Presso GL+ Auto for R203,900, approximately R7,150 of this asking price would be allocated to the “luxury” tax.

A boon for electric-car adoption

Not only will an adjustment to the AVLT be beneficial to internal-combustion-engine cars, but Cress believes that it will also be a boon for electric-vehicle (EV) adoption in South Africa.

EVs are generally priced out of reach of the majority of consumers, with the most affordable model in the country asking just shy of R400,000 for a small SUV-styled hatchback with a 100km/h top speed.

“A recalibration [of the AVLT] would make EVs more financially accessible to the volume market, stimulating local demand,” said Cress.

“If we can achieve a goal of more than 5% of new-car sales being electric by 2026 – approximately 30,000 annual units – we will reach a tipping point that will spur the necessary infrastructure, including widespread EV charging stations powered by renewable energy.”

Cress said that this will only happen if EVs can be priced more competitively, with an adjustment to AVLT as well as a temporary lifting of import duties – currently pegged at 25% – being two significant ways to bring this to fruition.

According to Naamsa: “The tax burden on consumers in South Africa is very high and Naamsa’s calculations show that the tax payable on a premium vehicle could be as high as 42% of the price of the vehicle, and on entry-level vehicles around 18%.”