Why our cars are so expensive

2012-03-29 00:00

IT is not uncommon for some luxury vehicles in South Africa to have almost half of the price paid go to government’s tax coffers.

Locally produced vehicles are perceived as more expensive in South Africa than when those same vehicles are exported and sold in international markets.

The main reasons for these price disparities are market and distribution differences, specification differences between the models sold, inclusion of things like motor plans, the exchange rate and then the taxes levied on local sales of vehicles.

Taxation is such an issue that the National Association of Automobile Manufacturers of Southern Africa (Naamsa) has discussed the issue with the government.

Naamsa executive director Nico Vermeulen says that it does not get involved in the pricing specifics of the different vehicle manufacturers and that the setting of prices for their products is their prerogative. “However, vehicle affordability and vehicle taxation represents an issue of concern to the automotive industry and the rising tax burden that confronts buyers of motor vehicles, including import duties, ad valorem taxes, emissions taxation in addition to the standard percentage of VAT levied is a matter that has been discussed with the Department of Trade and Industry and will probably also be discussed with Treasury.”

Motorists are taxed not just on the vehicles they buy, but also on fuel, tolls and fringe benefits for company cars. All these taxes bring in a substantial amount of money for Finance Minister Pravin Gordhan and his team to distribute come budget time.

The first thing that is added on to the price of the vehicle after it rolls off the assembly line is value added tax of 14%.

The second is ad valorem tax, a luxury excise tax that exponentially increases with the price of the vehicle and is calculated according to a formula: {(0,00003 x A) – 0,75}%. In this formula “A” means the recommended retail price, exclusive of VAT, less 20%. If a vehicle with the recommended retail selling price of R900 000 is taken, using this formula, the effective tax rate comes to 17,826%. If a vehicle with a recommended retail selling price of R200 000 is taken the effective rate is closer to three percent.

Next is the CO² emissions tax levied from 2010 which is on average about 2,5% to three percent and is directly payable by the manufacturer to SARS. This tax is also recovered through the selling price to dealers and consumers.

South Africa also has an import duty on new vehicles of 25% and on components of between seven percent and 15%, says Vermeulen.

South Africans generally buy their cars with more add-ons and specifications such as air conditioning and electric windows than buyers in overseas markets. The basic price quoted in certain international markets does not include these specifications and is only added to the price at the request of the buyer.

According to Guy Kilfoil, general manager: group communications and public affairs at BMW South Africa, the South African specification BMW 335i sedan features the following additional options as standard over and above the specification on the U.S. car: leather seats, a hi-fi loudspeaker system, park distance control, a sports leather steering wheel, a rear-view camera, electric adjustment and memory for the front seats and an eight-speed automatic gearbox.

“These are all stock standard on the South African car but are optional on the U.S. spec car. This alone makes up for more than R62 000 worth of additional standard options,” says Kilfoil.

Manufacturers who export also levy a margin when they sell to international markets, but considering that under the new Automotive Production and Development Programme manufacturers need to maintain production levels of 50 000 units and more to qualify for support, manufacturers might sacrifice some of this margin to keep up the volumes of exports, lowering the cost of the exported unit.

Once you consider all this and depending on what assumptions you make about the market you compare South Africa with, it is possible that a vehicle exported from South Africa into another market can be 50% cheaper than what it is sold for here.

Finally, vehicle buyers should remember that rapid fluctuations in the exchange rate could account for some of the anomaly in price. If the exchange rate to the dollar is R10 a vehicle costing U.S.$30 000 should cost R300 000 in South Africa. If five months later, the exchange rate drops to R7 to the dollar, suddenly that same vehicle is expected to cost only R210 000.

— www.moneyweb.co.za

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