South African plan to slash smartphone prices

Communications minister Solly Malatsi has said he has been in talks with the National Treasury about making smartphones more affordable and scrapping the luxury tax on some devices, GeekHub reports.

The minister has emphasised his “obsession” with removing or at least setting a threshold to the ad valorem or luxury tax on smart devices to make it more affordable for people to access this technology.

“We are not saying remove all the associated luxury goods taxes on smart devices, but have a threshold,” Malatsi told MyBroadband in a recent interview.

In the South African context, ad valorem is a tax on products deemed luxury items such as motor vehicles, electronic equipment, and cosmetics. A flat rate of 9% is applied to technology products.

This is a particularly salient issue given South Africa’s plan to phase out 2G and 3G networks over the next few years, eventually rendering cell phones using these technologies useless.

However, to ensure a smooth migration to 4G and 5G, entry-level devices must be more affordable and sales of new 2G and 3G phones may need to be restricted.

Smartphones also offer numerous other benefits in today’s digital economy.

“The cost to communicate in Africa is very high,” Malatsi told the SABC at the inaugural AfricaCom Ministerial Summit.

“We have to find policy interventions to bring relief and to get poor people, mostly in rural areas, to become active in the digital world.”

Malatsi said that by connecting people, they are being provided with better business opportunities as the minister believes the future of livelihoods on the continent lies in entrepreneurship.

Vodacom Group CEO Shameel Joosub echoes Malatsi’s sentiment, saying that cutting smartphone prices can improve Internet access and bridge the digital divide.

Joosub pointed out that only 25% of the Sub-Saharan population has access to mobile Internet and that more than half of the group’s entire customer base doesn’t have a smartphone.

He said this was due to the cost of smartphones, as entry-level devices can consume 16% of monthly incomes in low- to middle-income countries, such as South Africa.

A recent MyBroadband comparison found that the iPhone 16 is roughly 78% of the average South African salary, whereas it is only 16.74% of the average American’s salary.

This is mainly due to a weakened rand and taxes and shipping costs that shoot the price up.

While making iPhones more affordable won’t help solve the issue, the price difference caused by these variables illustrates South Africa’s problem.

However, many leaders at the summit pointed out that access is just one piece of the puzzle, and African countries will need to take control of the fourth industrial revolution after missing out on the previous three.

“Just because you have a phone does not mean you are a developed person,” said Ugandan Minister of Science, Technology, and Innovation Dr Monica Musenero Masanza.

“All the minerals that went into making that phone left your nation as raw materials, and all the knowledge used for its production was developed elsewhere.”

Musenero argues that while Africans benefit from this foreign technology, they must maximise its potential by encouraging domestic production.

Ad Valorem is outdated

Another reason the ad valorem tax needs to be reexamined is how it 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 argued 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.