Tech price pain in South Africa

Tech in South Africa, such as smartphones and gaming consoles, could be much cheaper if it weren’t for the country’s luxury tax, which can hinder the adoption of new technologies.

In the South African context, ad valorem is a tax on products deemed luxury items such as motor vehicles, electronic equipment, and cosmetics.

Conventionally, it’s just a tax based on the value of a transaction. Ad valorem tax duties range from 7% to 30%.

According to Schedule 1, part 2B of the Customs and Excise Act of 1964, ten types of electronic items are classified as luxury goods and are charged a 9% duty.

These are smartphones, monitors, projectors, videogame consoles, TVs valued at over R5,000, digital and video cameras, headphones, earphones, speakers, aircon, and microphones.

Electric vehicles are also included in the schedule, but the duty is calculated based on their value.

Many of these, such as video game consoles and aircons, can be classified as “up-market” consumer goods.

However, given that smartphones, for instance, have become part of many South Africans’ everyday lives, the question arises as to whether the definition of a luxury good, according to the Act, is still valid.

South Africa’s communications minister, Solly Malatsi, has said he wants to see a threshold placed on the ad valorem tax on smartphones to lower the barrier for people to upgrade to 4G and 5G technology.

The country is phasing out 2G and 3G technology and aims to switch off the older networks at the end of 2027, although this is not yet set in stone.

MTN has stated in a notice on its website that it will switch off its 3G network by 31 December 2026. It has not given a date for shutting down its 2G network.

However, many South Africans still use 2G and 3G devices as they cannot afford to buy the more advanced technology.

The fact that many South Africans who cannot afford 4G and 5G technology will be cut off from mobile networks indicates that these devices are more of a necessity than a luxury.

Another example is how the tax is applied to vehicles and how this can negatively affect the EV market.

Any vehicle over the value of R250,000 is deemed a luxury item.

However, when the tax was set for cars 30 years ago, R250,000 could buy far more “luxury” than today.

For instance, in 1994, you could buy a Mercedes-Benz E220 for R179,900. Adjusting for inflation, that same amount would be around R956,700 today.

Similarly, thirty years ago, motorists could buy a Jaguar XJ-6 AT for R369,505, worth R1,965,017 today if adjusted for inflation.

Thus, a Mercedes-Benz was not considered a “luxury” for the purposes of ad valorem in 1994, while a Jaguar was.

Today, only cars considered budget models are below R250,000.

As noted by Accenture’s Africa Principal Director of Automotive and eMobility, Greg Cress, adjusting the ad valorem tax could greatly benefit South Africa’s electric vehicle (EV) future.

This is because South Africans are currently being charged an ad valorem tax on the BYD Dolphin, the country’s most affordable EV.

The Dolphin is priced at just over R539,900 even though the car is sold for R253,823 in China.

If inflation had been considered for the ad valorem tax, only items that cost more than R1,329,493 would be taxed as a luxury good.

Cress argues that there are no EVs below the R250,000 threshold, meaning that due to the tax applied, the adoption of EVs in South Africa will be slow.

The table below shows a list of items regarded as luxury items by SARS, along with the ad valorem duty charged on them.