Tax cut on basic smartphones will make little difference

National treasury on Wednesday announced that luxury taxes on smartphones costing R2 500 or less will be removed. While the industry has cheered the move, the real-world impact may prove minor.

The announcement by treasury of a move championed by communications minister Solly Malatsi, aims to lower the cost of accessing 4G-capable devices at the lower end of the market ahead of the planned shutdown of 2G and 3G networks in the coming years.

The telecommunications industry applauded the announcement, with the Association of Comms & Technology – the industry lobby group representing South Africa’s largest network operators – describing it as a “significant step forward in driving digital inclusion … especially for those in low-income households”.

But just how much of a difference will the 9% cut in ad valorem duties make to the price of a device costing R2 500 or less? It turns out that the answer is not terribly much.

“The reality is that the removal of 9% does not make it possible for [the poor] to afford smartphones,” Olebogeng Ramatlhodi, indirect tax leader at Deloitte South Africa, told TechCentral. “You need to remove VAT from the equation, but even that doesn’t even go far enough, so you probably need an incentive, too.”

Analysis provided by Ramatlhodi looks at four different scenarios: devices costing R1 500, R2 000, R2 500 and R3 000 are used throughout the comparison. The R3 000 price point shown represents a “what if” scenario to demonstrate the impact that a limit of R3 000 – instead of R2 500 – would have on the tax relief measures. For the analysis, it’s assumed that importers put a 10% margin on each device.

Status quo

The first case (see table below), represents the status quo, prior to the 9% cut in ad valorem duties coming into effect on 1 April.

Although removing the ad valorem duty has the effect of lowering the total cost of a device – by R135 for a R1 500 phone and R225 for one costing R2 500 – it is the VAT component of the calculation that represents the most significant tax on smartphones. VAT amounts to R268 for a R1 500 device, R357 for a R2 000 device and just under R450 for at the R2 500 price point. (These VAT amounts are calculated after ad valorem duties and margins have been factored into the price.)

The second table, above, shows the retail price reductions that will take place after the new ad valorem rule takes effect in April. However, a month later, on 1 May, a 0.5 percentage point increase in the VAT rate will come into effect, which will have the effect of clawing back some of the price benefits, even if only marginally. These changes are shown in the third table below.

The fourth table shows the impact that exempting devices costing no more than R2 500 from VAT would have prices. The impact is even more significant than the removal of ad valorem excise duties.

“National treasury missed an opportunity to reduce the cost of a device meaningfully by not adding cellphones (R2 500 or less) to the list of VAT zero-rated products,” said Ramatlhodi. Government has more work to do in bridging the affordability gap, he added.

“The removal of VAT along with a R500 voucher for qualifying individuals would go a lot further towards meeting people where they are.”

Read: Comms minister in big push for cheaper smartphones

Asked to comment on whether the addition of low-end smartphones to the basket of VAT-exempt goods was discussed with treasury, or whether it might be part of future discussions, Kwena Moloto – the spokesman for communications minister Malatsi – said the minister will reserve comment until the budget vote is passed by parliament.  — (c) 2025 NewsCentral Media

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