The New Smartphone Tax in South Africa Is Hitting the People Were It Hurts

Recently, South Africa’s minister of finance Tito Mboweni announced that the government is set to raise the tax on luxury goods with the inclusions of smartphones. In his statement, he proposed an excise duty of luxury goods be raised to 9% with the aim of increasing ad valorem excise duties. Ad valorem product includes electronic equipment, motor vehicles, perfumes, cosmetics, and other products considered as luxury products.

In his statement, Mboweni claims that there are plans to increase ad valorem excise duty on motor vehicles from 25% to 30% and proposes that cellular phone classifications should be updated to include smartphones. Other than that, the government plans to increase ad volerem exercise duty rates which are currently at 5% and 7% to 7% and 9% to ensure that households that spend more on luxury good contribute proportionally to revenue. The government is also consulting on a proposal to replace the current flat rate of cell phones with a progressive rate structure based on a phone’s value.

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Smartphone ownership pattern is similar to that of the internet use and so internet users haven’t been spared either. Internet users are set to pay more for such services as Netflix and other internet services come April 1, 2019, due to the exercise duty on these services. Experts say that the taxation may affect business in South Africa as South African will now be forced to evaluate whether certain services pass on as electronic services.

Baker & McKenzie states that the impact of this regulation is that every service supplied from overseas through the internet, the electronic communication companies or any electronic agent are now grouped as electronic services for purposes of excise duty tax. Only a few of these services have been exempted including educational, and telecommunication services. Some of the affected services include cloud computing, gaming, advertising services, broadcasting, software subscription services, and any booking services done via online platforms. The regulation also touches on software usage by any South African entity provided by electronic means by any investment firm situated abroad.

What does this mean to South Africans?

Every South African has to be very worried about these regulations since most of them rely on the internet for their day to day routines. As of 2018 September, almost half of South Africans owned a smartphone and more than 75 percent had access to the internet with most of them making purchases online.

Baker & McKenzie said that these regulations are likely to force companies like Google, Facebook, Twitter, and Netflix to register for excise duty tax. The regulation states that any company that delivers services electronically that exceed 1 million Rands, will need to register for tax. If these companies decide to roll out on the tax, then they are likely to pass on the charges to their customers. South Africans would definitely bear the tax in form of higher prices of these services. What does this mean technologically?

It would lead to a decline in electronic transactions

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It’s an undisputed fact that most South Africans use their mobile phones for electronic transactions like to pay or access to basic products and services including healthcare, food, and education among others. Under this new tax regulation, the government will tax every transaction done electronically by up to 5%. This will definitely raise the costs of conducting these transactions and is likely to limit the number of people that can afford to pay for the electronic transactions. The regulation, therefore, will deprive off South Africans of one of the common methods used to purchase products and services. This puts the country at an awkward position because it is destabilizing one of the most common transaction methods.

Connectivity

Mobile phones especially smartphones has made it easier for people to be connected either via voice calls, video chats, and normal texts. During the past few years, there has been a growing demand for smartphone devices which has caused connections to blossoms. The use of the internet over the phone has also greatly advanced and has shaped the communications on mobile devices. Due to this increase, the government has decided to check in and have a fair share in terms of tax.

The government believes that through taxing the use of mobile phones, they are able to raise up to 1 billion Rands in tax in a year. But this might have dire consequences in terms of connectivity. The cost of using these smartphones might rise way above the normal usage and will force most South Africans to reduce their spending on smartphones and the rate of calls and internet usage. The move might force some essential investors out of South Africa and this can only lead to a lag in technological advancements in the future compared to its neighbors.

Smartphone taxation affects economic growth

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According to the GSM association research on the effect of smartphone penetration, increasing the amount of data used per 3G connection increases a country’s GDP by 0.5. The research further states that a 10 percent increase in mobile penetration increases a country’s productivity by almost 5 percent in the long run. These statistics show how important smartphones are to a country’s economy.

Studies have also indicated that as people move from 2G connection to 3G connection and from 3G connection to 4G connection, the employment rate of a country rises. This is a key point the government is missing. From the mentioned research, the government should be aware that there is a strong correlation between the wealth of a country and the ownership of smartphones. As such, the South Africans need higher internet penetration, more smartphones and more data usage and any regulations targeting this sector are a set back to the economy.

Concluding remarks

Smartphones are everywhere and any attempt of taxing them makes no sense economically. It is completely understandable to tax smartphones and regulates tariff rates but the value of these taxes are very high. If the government wants to tax luxuries, it can do so by introducing a tax policy for them. They simply can’t include smartphones to this bracket otherwise, they are going to chase investors out of South Africa and leave the country economically unstable.