The government is the biggest beneficiary of the South Africa auto industry, says manufacturing and industrialisation expert Justin Barnes.

The average tax on an average vehicle sold in South Africa is roughly R120 000.

“So, on average, when you buy a [R500 000] motor car in the market, R120 000 is handed over to government in the form of value-added tax, ad valorem (luxury) tax, carbon tax and the tyre levy.”

For a more luxurious vehicle, priced at more than R800 000, the tax burden is 34%, notes Barnes.

Barnes’ comments come as government is reviewing its ad valorem duty structure on new light vehicles, as part of an effort to address the dominance of imported vehicles versus locally manufactured vehicles – or, in other words, it is mulling a potential tweaking that could possibly accrue some benefit to local assemblers.

South Africa last year saw 15.7% growth in new-vehicle sales, to 597 000 units.

Within this number, however, the percentage of vehicles assembled in-country as completely knockdown (CKD) units made up only 33% of sales – down from 56% in 2006 – this while imports continue to surge ahead.

Barnes says the current level of taxation means that government derives a “huge fiscal benefit” from healthy automotive sales.

The opposite, however, is also true, as a decline in sales, and in local manufacturing, both have fiscal consequences in terms of the revenue flowing to government.

“There is a serious economic consequence for the automotive industry if it is overtaxed and the market is penetrated too aggressively by imported vehicles that don’t offer the underlying value addition [local car makers offer],” notes Barnes.

“This industry creates R120-billion worth of direct gross value-added through the seven vehicle assemblers.

“You have to try to balance the tensions between what is good for production, but you also have to ensure that the market is not negatively affected by creating too much protection for the local industry through some form of price advantage that the consumer ultimately has to bear.”

Toyota South Africa Motors (TSAM) president and CEO Andrew Kirby agrees with Barnes, describing the ad valorem tax on a R500 000 vehicle as “enormous”.

“The question is how to adjust this to see a volume benefit, so that the net income received by the fiscus remains strong. It is possible to do that.”

Kirby says it is possible that a 1% price drop can see a 3% increase in sales in some instances.

“So, yes, there is potential, and ad valorem is the obvious way to tweak that. Justin is doing a lot of modelling to see how we can tweak the ad valorem portion of vehicle tax to generate an improvement in affordability. But we need to balance the books for government.”

While ad valorem tax started out as a luxury tax, it has since become ‘just a vehicle tax’, adds Barnes.

Ad valorem was implemented when South Africa’s cheapest cars started at a price point of R40 000.

“It had a flat gradient and only started being punitive at R500 000.”

Thirty years later, however, many entry-level vehicle prices are now priced nearer to R500 000.

“It has now become punitive,” says Barnes.

“Ad valorem must be dealt with. It is highly problematic and anti-developmental. It does not work in favour of the market or [the auto] industry. It needs to be adjusted for us to move forward.”

Cohesive Framework Needed
Barnes also argues for a more comprehensive, cohesive management of South Africa’s vehicle parc.

Policy around local vehicle assembly and imports are handled by the Department of Trade, Industry and Competition, while the Department of Transport handles vehicle registration and the country’s fleet management, with National Treasury “collecting the money”.

Going forward, this has to be more coordinated, says Barnes.

He says South Africa cannot afford the “massive overtaxing” in the domestic market side, very generous support from government to the local assembly industry through the Automotive Production and Development Programme (APDP), and a Transport ministry that fails to regulate the country’s vehicle fleet – new and used – in terms of safety and maintenance standards.

“These three things need to tie up for South Africa to get the benefits from increased production and sales.”

Barnes is a Toyota Wessels Institute for Manufacturing Studies executive director, African Industrialisation Services director and Gordon Institute of Business Science (GIBS) associate professor.

He was responsible for the creation of the manufacturing-focused MBA stream at GIBS and is also an architect of government’s APDP.

Barnes and Kirby spoke at the Toyota State of the Motor Industry event held earlier this month.