Outdated tax making cars expensive in South Africa

South Africa has not adjusted a formula used to calculate ad valorem duties on vehicle imports in three decades, meaning budget models are taxed similarly to the luxury models of yesteryear.

In the past few years, a lot of noise has been made about the 25% duty that applies to global imports of electric and hybrid vehicles and petrol and diesel cars sourced from outside Europe and the United Kingdom.

The ad valorem duty only came under the spotlight after it was highlighted by Greg Cress, the Principal Director of Automotive and eMobility at Accenture in Africa.

In September 2024, Cress called for adjusting ad valorem to benefit South African consumers and, specifically, the future of electric vehicles (EVs) in the country.

Official South African Revenue Service (Sars) documents make no mention of a minimum value for a car to qualify for the ad valorem, but a cap of 30% applies.

To determine the ad valorem rate, the following formula is used:

• % = [(0.00003 * retail value less 20%) – 0.75]

The formula is designed so that the rate increases exponentially on a sliding scale.

For example, a car with a R100,000 retail value in its country of origin has an ad valorem tax rate of 1.65%, working out to R1,650.

A vehicle with a R200,000 retail value has an ad valorem tax of 4.05%, working out to R8,100. The tax is nearly five times higher despite the car being twice the value.

The issue is that this formula has not been adjusted in 31 years, and ad valorem is used specifically for categories of goods perceived as luxury items rather than essential to the average citizens’ daily lives.

At the same time, car prices have increased substantially due to inflation and the weakening of the rand.

A car valued at R200,000 today is being taxed at the same rate as a R200,000 car in 1994.

31 years ago, South Africans could buy several luxury BMW or Mercedes-Benz models at that price.

In the past few years, there are only a handful of budget cars available around that price for new — primarily from brands like Suzuki, Toyota, and Renault.

The most affordable car in the country — the Suzuki S-Presso — is priced from R178,900 to R219,900, depending on the trim and gearbox configuration.

The tax has a particularly big impact on imported EVs, as these generally have higher retail values than similar petrol or diesel cars.

The table below shows how much the three-decade-old ad valorem duty on imported vehicles adds to the cost of cars, with values ranging from R100,000 to R1 million.

Balancing consumer needs with local manufacturing

From the consumer’s perspective, there is a strong argument for adjusting the formula to account for inflation over the past 31 years.

However, doing so could come at a cost to one particular industry.

Car manufacturing plants are already finding it difficult to compete with imported products.

Vehicles made in India and China have flooded the market and eaten into the market share of South African-made models.

In 2024, 157,326 cars were imported from India, while more than 39,000 were brought into the country from China.

Collectively, they made up 38% of all new cars sold in South Africa.

Many cars from these countries can undercut locally-made models on price or offer far better value for money than similarly priced models made in South Africa.

That is despite getting slapped with the 25% duty and ad valorem.

India and China have large economies of scale and low labour costs, while Chinese manufacturers also benefit significantly from government subsidies.

However, local carmakers have increasingly complained to the government about the high cost of doing business in South Africa, which is making it even more challenging to compete on price.