South Africa’s vehicle manufacturing industry is preparing to approach the government with a request to reduce the taxes on new vehicles as part of an initiative to stimulate local demand for vehicles in the country.
National Association of Automobile Manufacturers of South Africa (Naamsa) CEO Mike Mabasa said the tax on new vehicles in South Africa is too high relative to other countries.
Mabasa said the tax charged on premium vehicles in South Africa, for example, is about 42% taking into account all the different taxes.
Included in this tax basket is 15% Vat, import duties, ad valorem tax, the tyre levy, the CO2 emissions levy and the export levy, he said.
“The export levy is another form of tax because the government is now imposing it on all vehicles manufactured in South Africa that we export to other countries,” said Mabasa.
“That is a challenge for us because we are now paying double tax. We are paying a tax on all cars exported from South Africa and also paying an import tax on these vehicles in the country of destination.”
Mabasa said Naamsa has appointed an independent group of economists to help the association understand and put together a proposal about how best to stimulate demand for vehicles in South Africa.
“For us to stimulate demand for vehicles, we cannot obviously exclude a conversation about tax.
“We want the government to reconsider these things. That is why we want to do this piece of work so we will be able to go back to them with a proposal that will help us reduce some of that taxation quite significantly.
“When they are reduced, we want the benefits to accrue to the consumer so that it becomes cheaper for consumers to buy new vehicles and we can stimulate demand for new cars,” he said.
More cars for more customers
Mabasa added that one of the key objectives of the Automotive Masterplan is local market optimisation.
He said discussions between the automotive industry and the Department of Trade and Industry about the Automotive Masterplan did not break down the meaning of optimising the local market so that the industry will be able to stimulate demand for vehicles.
“With the advent of Covid-19, we feel we should bring forward this work,” he said.
Local market growth
Rob Davies, the then minister of Trade and Industry, commented specifically about local market optimisation in November 2018 when he announced the details of the Automotive Masterplan.
Davies said the South African automotive industry will not realise its critical objective of achieving 1.4 million units of vehicle production in 2035 unless two fundamental changes occur in respect of the domestic market.
He said the first fundamental market change relates to South Africa’s future growth.
“The domestic market will need to grow at a compounded average growth rate (CAGR) of at least 4.5% for passenger vehicles, 3.5% for LCVs [light commercial vehicles] and 3% for M&HCVs [medium and heavy commercial vehicles] from 2017 to 2035 to support vehicle production of 1.4 million units.
“These growth rates will take the total domestic market to 1 179 815 vehicles by 2035, ensuring South Africa remains a second-tier market,” he said.
However, Davies said the growth of the domestic market is strongly tied to the state of the South African economy, with a strong and direct correlation between economic growth rates and vehicle consumption evident.
More local market share for local manufacturers
Davies said the second fundamental change required in the domestic market is consequently the potential for local manufacturers to capture a substantially greater portion of the South African vehicle market than is presently the case.
Mabasa said Naamsa is hoping the group of independent economists will complete the report the association has commissioned by the end of August.
He said one of the reasons Naamsa wants the report completed so quickly is to enable it to engage with government on these issues before Minister of Finance Tito Mboweni’s delivers his next medium term budget policy statement in September or October.
However, Econometrix chief economist Azar Jammine is skeptical about the automotive industry getting a positive response from government to a stimulus package for the industry.
“There is already a lot of criticism levelled at the dti [Department of Trade and Industry] for spending two thirds of its incentives and subsidies on the motor industry and one third on every other industry in the country all together,” he said.
Mabasa said the brief given to the group of independent economists is very broad and includes an international benchmarking exercise.
He said South Africa is the 22nd biggest market in terms of vehicle production globally and the economists Naamsa has commissioned have been requested to get in touch with all the other 21 countries that produce more vehicles than South Africa.
He said Naamsa wants to understand what it is that these countries are doing and whether their governments have given them any stimulus packages and, if so, what kind and how they are being assisted to stimulate local demand for vehicles.
He said the comprehensive analysis by the group of economists will enable Naamsa to determine the basis on which it will approach both the minister of finance and the minister of trade and industry and competition to “see the government’s appetite for a stimulus package for the industry”.
Turning to the export levy, Mabasa said it was introduced about two years ago and is administered by the National Regulator of Compulsory Specifications (NRCS), with the income generated going towards the operational costs of the NRCS.
“Our view is that it is a double tax and that levies and taxes should not be used as a blunt instrument to fund administrative costs and so. It [the NRCS] should actually be an enabler that will drive industrial production as opposed to introducing a levy that imposes increased costs for manufacturers,” he said.
Mabasa stressed that Naamsa is unaware of any other country globally that has an export levy.
He said this levy obviously negatively impacts on the global competitiveness of the South African automotive industry and could potentially lead to fewer vehicle exports from South Africa, which will negatively impact on the industry foreign exchange earnings and trade balance.
Mabasa said automotive multinationals look at the cost of producing a specific model at all of their plants that produce that model.
If South Africa has become more expensive to produce that model, they will obviously reconsider producing that model in South Africa because they can produce it cheaper in another country, he said.
This article first appeared on Moneyweb and was republished with permission.