Consumers poised to cash in on cheaper luxury goods
Sharply reduced ad valorem duties will make many products affordable to poorer families for the first time, writes LEE-ANNE SMITH
The price cuts, which should trickle down to the man in the street within three to four months, are likely to come about as a result of the sharp reduction of ad valorem duties proposed in his Budget speech, by Finance Minister Trevor Manuel.
Arguing that high duties, like VAT, create a powerful incentive to evade tax through illicit trade, Manuel proposed that existing ad valorem rates of 37.5% and 32.5% be reduced to 15%. Items which attract duties of less than 15% are not affected by the proposals. Turn to page 16 for our table of items that will be affected.
Several industries have spent years campaigning for ad valorem duties to be cut, but Manuel's proposals went further than many stakeholders expected, says Mike Schussler, economist at broking firm EW Balderson.
Schussler says apart from curbing illegal trade, reduced ad valorem tariffs will also help bring local industries in line with overseas competitors.
The fact that the duties are imposed on locally manufactured items as well as imported goods means that SA industries will also benefit from the 22.5% saving on duties. The saving should enable local firms to expand their operations and, ultimately, stand a better chance of competing in international markets.
Schussler expects the reduction in duties to translate into cost savings for consumers across the board. More importantly, it should boost lower end consumer growth because items previously beyond the reach of poorer sections of the community will become more affordable.
However, he does not expect the benefits to be visible overnight: "Prices take longer to decline downwards so it could be three or four months before cost savings become apparent. Consumers should probably watch prices for a month or two before considering making purchases on items affected by the proposed ad valorem tax changes."
Wally Hopton, technical advisor to the Cosmetic Toiletry & Fragrance Association of South Africa, says the reduction will have far-reaching implications for SA's cosmetics industry. He says the benefits for consumers and the industry will go beyond perfumes - a broad range of toiletries ranging from face cream, sunscreens, and body lotion preparations, to shampoos, deodorants, and hair preparations should become more affordable.
Hopton says that although the association's ad valorem committee has been engaged in negotiations with the Department Customs and Excise, it did not expect the decrease in the rate to be so dramatic. "We are grateful for this. We believe the time and effort put in has been fully repaid by this significant reduction in what we have always considered a discriminatory tax. We also believe the pragmatic businesslike approach to ad valorem augurs well for the future."
Hopton says the cosmetics industry is wrongly perceived by many as being highly profitable.
"In 1996 a survey by the association revealed that the pre-tax return to the industry is, on average, 3%, which is extremely low. A 10% to 15% return is generally considered reasonable for investors."
Another survey, of countries where ad valorem tax is levied, showed that while perfumes attracted ad valorem duties in some countries, this was not payable on general cosmetics.
"We were out of step with most of our trading partners, but these proposals change the situation. Hopefully now the industry will be able to grow and develop like the rest of the world."
Hopton adds much still has to be done in terms of education and development within the South African cosmetics industry to ensure that it becomes a world-class competitor, but that with adequate resources and new markets the potential for growth is enormous.
Harry Voerman, vice chairman of the Association of South African Music and managing director of Polygram, South Africa's largest music company, says the industry has long been fighting for a reduction in ad valorem duties and that his association will encourage its members to pass the reduction to dealers.
"We can't make a decision as an industry - it will be up to individual companies - but if the reduction is passed on to dealers we are likely to see CDs come down in price.
"Hopefully this move will also help put a brake on parallel imports which is a major problem in the music industry. All too often products are not declared under the appropriate customs category and so do not incur the same taxes as legitimate goods."
Dolf van den Berg, director of the Consumer Electronics Association, also welcomes the reduction in ad valorem duties and says it will benefit the whole economy.
"This will help clean up the industry by levelling the playing fields between legitimate importers and smugglers. Hopefully it will result in more people importing legitimately and will enable the South African Revenue Services to have more people in the tax net at 15% than they had at 37.5%
"It will also boost the local industry by enabling it to plough more money into research and development and, most importantly, will benefit the consumer through greater cost savings."