Calls are growing for national treasury to scrap the luxury taxes on smartphones to make them more affordable and to improve digital access.

This comes after TechCentral reported earlier this month that new communications minister Solly Malatsi plans to meet with finance minister Enoch Godongwana about the impact of taxes on the cost of smartphones, which have become a crucial tool for access to economic opportunities in the modern era.

Industry lobby group the Association of Comms & Technology – which represents the country’s six largest telecommunications operators – has said it also plans to engage with treasury on the classification of smartphones as a luxury good so as to better manage the switch-off of 2G and 3G networks.

Even with the planned meeting of the two ministers, an industry expert TechCentral spoke to on Monday said that scrapping ad valorem duties (effectively, luxury excise taxes) alone will not go far enough in making smartphones more affordable.

“Over the past few years, there have been many attempts to speak to national treasury about removing ad valorem duties, especially for older 2G and 3G devices. But I think because of the [poor] way the economy has been performing, national treasury has not been willing to listen to that type of conversation,” said Olebogeng Ramatlhodi, indirect tax leader for South Africa at Deloitte.

“But if you only scrap ad valorem taxes, the impact will not be that significant. Adding VAT to it will really make a dent,” he said.

According to the South African Revenue Service (Sars), products that include ad valorem duties include motor vehicles, electronic equipment, cosmetics, perfumes and other products generally regarded as “luxury items”.

More affordable

When ad valorem taxes are bundled with VAT (currently 15%), they account for between 24% and 30% of the input costs of a cellphone in South Africa. For a citizen aiming for the cheapest 4G phone available in South Africa today, this means the price could be reduced from R1 000 to as little as R600, making it significantly more affordable, said Ramatlhodi.

He said although cellphones, including smartphones, do not attract additional customs duties as with some other imported items such as textiles and homewares – because South Africa is party to an International Trade Administration agreement that scrapped import duties on selected electronic products including cellphones and laptops – the taxes that do apply still add significantly to the prices consumers pay.

Read: Africa has a feature phone problem

Ad valorem duties apply across the spectrum of devices available in South Africa, from basic 2G feature phones to more advanced 3G and 4G smartphones, as well as high-end 5G devices, Ramatlhodi said.

Calculating the amount of ad valorem tax to be paid to Sars is also not always straightforward. The 9% ad valorem rate must be applied to the value of the device, plus 15% VAT. So, for a phone imported at R1 000 – the retail price of the cheapest 4G device in South Africa – the 9% ad valorem rate is applied to R1 150 to get R103.50 in ad valorem taxes payable to Sars.

Like the ad valorem tax calculation, the amount of VAT payable on a cellphone comprises the customs value of the item plus 10% thereof, plus any non-rebated taxes all multiplied by 1.15. Non-rebated taxes are a 10% and 15% levy South Africa imposes on imported goods so as to disincentive the purchase of imported goods in favour of local products.

So, on a R1 000 cellphone, R1 000 + R100 + R150, which equals R1 250, is multiplied by 1.15 to get a VAT repayment of R187.50. This means that in total, the device costs R1 000 plus R103.50 (ad valorem) and R187.50 (VAT) for a total of R1 291.

A similar calculation for a device with a retail price of R7 000 shows that the device will cost around R5 400 if ad valorem taxes and VAT are both excluded.

“Similar concessions have been made for brown bread, maize meal and samp. Government and the telecoms industry could come together and make a similar agreement on cellphones up to a certain amount,” said Ramatlhodi.

He said these concessions need not apply to 2G and 3G devices because government has already set a deadline to sunset these technologies by 2027. This makes it even more important that 4G devices, at the very least, are made more affordable because 4G mobile communication is becoming the basic standard for connectivity in South Africa, he added.

He said government could also assist the most indigent by providing an incentive such as a subsidy – in the same way that set-top boxes for the digital migration were – and added that if these groups are well researched and well-defined by government, the total cost would not be excessive.

Billions of rand

When Malatsi meets with Godongwana over cellphone taxes, the two men are going to have to contend with the impact that scrapping taxes, whether partly or wholly, will have on an already constrained fiscus. On the other hand, there are opportunity costs to having significant portions of the population excluded from an increasingly digitised economy.