How will the new VAT rate hit car sales in South Africa?

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On 1 April, the new VAT rate of 15% kicked in across the nation and Head of Gumtree Automotive Jeff Osborne outlined the likely impact on the local motoring industry.

While the VAT increase was never going to be welcomed, and some industry bodies have warned of a drop in sales as a result, I believe the impact on the vehicle market won’t be that significant.

There’s no doubt that a 1% increase on a big ticket item like a car is a sizable gross amount – it’s an extra R3000 on a vehicle worth R400k including VAT – and that will discourage new car buyers to some degree. However, the VAT increase should only affect the retail price and not the cost of parts and components procured in the manufacturing process as that VAT is claimed back by the car maker. And, in a highly competitive space, dealers might drop prices to swallow the VAT increase.

Fleet sales should be unaffected as VAT is also re-claimable there. And pre-owned vehicles are not subject to VAT and, by our estimates at Gumtree, there are more than two pre-owned vehicles sold each year in SA for every new one. So that massive market will remain buoyant and re-sale values will not be affected.

Lately, there has been a swing back towards new vehicles, as the price gap between new and pre-owned has narrowed. That has been due to stock shortages of some desired pre-owned models and the fact that new vehicle price increases, in many cases, have been held to well below CPI for several years. This trend might marginally reverse because of the VAT increase.

Where the industry will be hurt is in the additional costs of motoring. Petrol is zero rated but the finance minister took another specific tax swipe out of it in his budget, and tyres, insurance, repairs and maintenance will all go up.

But, taken overall, I believe the more optimistic outlook in the economy, and the consequent strengthening of the rand, will counteract the negative impact of the VAT increase in terms of sales. That’s provided the current mood is maintained. New cars are often confidence purchases and confidence can be a fragile thing.

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