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Are luxury taxes still relevant?

15th May 2015

By: Riaan de Lange

  

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One of the confines of the Customs and Excise Act of 1964 is the Schedules to the Act, commonly known as the Tariff Book. This is part of what I call the customs and excise trilogy, which consists of the Act, the Rules to the Act, and the Schedules to the Act.

If you ever wondered why an imported product is so expensive, you might well find the explanation in one, if not more, of the Schedules to the Act or its Parts. Just to qualify, aspects of the Schedules to the Act (including its Parts) also relate to locally manufactured goods in the form of an excise duty. A complicating matter for a nonspecialist in customs and excise is the inconsistent use of terminology. (This in itself warrants an academic study.) Looking past the terminology of duty, tax and levy, Part 2 of Schedule No 1 to the Act (ad valorem excise duty), for instance, confers the status of ‘excise duty’ on both imported goods and locally manufactured goods. This collective classification was introduced by the South African Revenue Service (Sars) on August 3, 2012 – retrospectively to April 1, 2012 – to apparently allocate all such proceeds to the excise duty account, thus overstating the actual excise duty proceeds. An excise duty is, of course, applicable to locally manufactured goods only.

The ad valorem duty (duty on the value of the good) imposed under Schedule No1, Part 2, of the Act was introduced on January 1, 1978, more than 37 years ago. At the time of its introduction, with the distinction between customs duty and excise duty, these duties were called ‘contra duties’ (‘contra’ means against or opposite). The theory is that both the imported good and the domestic manufactured good (‘of the same kind’ – in other words, essentially the same) were subject to the same nominal rate of duty. But the effective rate of duty will differ, as the basis on which the nominal rate of duty is applied differs between an imported good and a locally manufactured good.

An ad valorem duty is also commonly known as a ‘luxury tax’ and payable on certain goods in addition to the ordinary customs duty (Schedule No 1, Part 1 of the Act). As the term ‘luxury tax’ suggests, the rationale behind imposing duties on these goods is that they are, by definition, ‘luxury goods’, also known as ‘nonessential goods’. According to the Merriam Webster dictionary, a ‘nonessential good’ is something that adds to the pleasure or comfort but which is not absolutely necessary – it is a ‘nice to have’, if you will.

Given this background, contemplate for a moment what you would consider to constitute ‘nonessential goods’. Consider that there are in the order of 7 500 tariff subheadings (good descriptions) in the Tariff Book. A total of 104 tariff subheadings (or 1.39%) are subject to ad valorem excise duties.

So, what goods are affected? The most obvious are, no doubt, perfumes and toilet water. (Tell me, with a straight face, that ‘toilet water’ did not make you smile. The French have a knack for making things sound exquisite; they call it eau de toilette, which means lightly scented cologne used as a skin freshener. The term ‘toilet’ is used to describe the process of washing and personal grooming.) The other obvious ones are motor vehicles and motor cycles.

With the exception of ‘beauty or make preparations’, and ‘motorcycles’, on which a 5% ad valorem duty of is applicable, and ‘motor vehicles’, which are subject to the application of a formula, all other goods are subject to a 7% ad valorem duty.

Any thoughts yet on what ‘other goods’ constitute? These are essentially fireworks; articles of apparel, clothing accessories and other articles of fur skin; air-conditioning machines; line telephone sets with cordless handsets; telephones for cellular networks (cellphones); microphones and stands thereof; loudspeakers; headphones and earphones; television cameras, digital cameras and video camera recorders; monitors and projectors that do not incorporate television reception apparatus; reception apparatus for television, whether or not incorporating radio-broadcast receivers; television sets (with cathode-ray tubes or other – including black and white sets); projectors; water scooters (wet bikes); revolvers; pistols; muzzle-loading firearms; other sporting, hunting or target-shooting rifles; other spring, air or gas guns or pistols; games of skill or chance (gambling); video game consoles; and golf balls.

There must surely be a number of goods that you would not have considered nonessential goods. The ones that stand out for me are fireworks (particularly as they have religious applications in certain communities); cellphones and television sets; muzzle-loading firearms (arguably more of a collector’s item); and golf balls (if you want to tax sport activities, why not tax all sport equipment?).

This raises a number of questions, including: What is the basis for the classification of nonessential goods, and is this classification is still relevant? Surely, today’s luxury may be tomorrow’s necessity. What is the intention for the imposition of this duty? A more pertinent question is: When last were these goods subjected to a review process to reconsider their classification? Then, of the 104 tariff subheadings – according to the 2013/14 tax statistics – the bulk of revenue is generated by motor vehicles/motor cycles (68.80%), which are also subject to ‘environmental levies’, followed by ‘electronics (27.54%) – collectively 96.33%. (It would be interesting to have sight of the revenue generated by the respective tariff subheadings, as Sars does not make such information available.) In recent Budget speeches, the Finance Minister merely removed goods from this schedule. The future consideration should, arguably, be more substantial, including the consideration of the schedule’s preserve or removal.

One could conclude that, at best, this schedule is a relic (an object surviving from an earlier time) which serves very little or no purpose, even as a fiscal measure. Although it generated R3.23-billion in 2014/15, it is understood that these proceeds were deposited in the Southern African Customs Union (Sacu) National Revenue Fund (NRF) for redistribution among its member countries. At the very least, this could be remedied by simply amending the terminology from ‘ad valorem excise duty’ to ‘ad valorem excise levy’, since a levy does not form part of the Sacu NRF. It just goes to show that, in customs and excise, terminology matters.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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