New ‘driving tax’ for South Africa could push drivers to go electric

Changes to South Africa’s legal framework for electric vehicles could go a long way in boosting production and sales in the sector, say legal experts at Cliffe Dekker Hofmeyr (CDH) – including tax breaks for producers and tax hikes for drivers who use petrol and diesel cars.

In a note published this week, CDH experts outlined the current state of tax on petrol and diesel vehicles while outlining potential changes in the country’s legal framework that could work alongside regimes already in effect.

The legal experts noted that the local manufacturing and storing of vehicles that produce CO2 are already subject to carbon taxes in South Africa, as are general road users who buy petrol and diesel at the pumps through a fuel levy.

This levy was increased to 9c/l for petrol and 10c/l for diesel from 6 April 2022 and is payable in addition to the general fuel levy and the road accident fund levy.

However, in light of the use of petrol and diesel vehicles being scaled down – and eventually banned – in the United Kingdom and European Union, the South African government is under pressure to transform the local motoring industry.

“Two of South Africa’s – and Africa’s – largest trading partners, particularly for motor vehicles, include the UK and EU,” CDH said.

In April 2022, the UK Department of Transport published a paper titled: “Outcome and government response to the green paper on a New Road Vehicle CO2 Emissions Regulatory Framework for the UK” which, amongst others, confirmed that the UK Government will introduce a zero-emission vehicle mandate setting targets requiring a percentage of manufacturers’ new car and van sales to be zero emission each year from 2024.

Furthermore, the UK Government announced that it will continue to regulate the CO2 emissions of new non-zero emission cars and vans to limit their emissions until all new sales are zero-emission at the exhaust.

If not fully zero emission, it was stated that all new cars and vans sold between 2030 and 2035 must have significant zero emission capability. The European Commission has similarly implemented various regulations and intends to cut carbon emissions from motor vehicles by 55% by 2030 with a 100% target by 2035.

“The impact of these measures will have a profound influence on Africa and South Africa as exports to those markets will be significantly impacted unless the local market starts to embrace the move towards ‘net-zero’ and commences producing electric vehicles,” CDH said.

The legal firm highlighted three key measures that will likely encourage the shift to electric vehicles in South Africa:

Special Economic Zones

In advancing its efforts towards promoting economic growth and industrial development, the South African government, via the Department of Trade and Industry, has established various special economic zones (SEZs) within designated areas in South Africa, CDH said.

“Importantly there are a number of specific tax incentives including income tax, value-added tax, customs & excise and employees’ tax incentives that a “qualifying company” in an SEZ, could potentially benefit from.”

The legal experts said that motor vehicle manufacturers and their suppliers should consider moving into these zones and take advantage of the gap in the electric motor vehicle market. Tax incentives could see companies taxed at 15% rather than 27%, among other benefits.

“The commercial impact of these incentives is very favourable, and it could be used as a key tool to adapt to the growing global shift towards net-zero motor vehicles,” it said.

Potential new “driving tax”

CDH said that a recent white paper from the Department of Transport proposed, amongst others, further investigations of additional and innovative funding strategies for traffic management functions.

Among the funding strategies are new taxes, which CDH said may not apply to electric vehicles if tied to fuel sales.

“It was announced that a traffic-management levy to vehicle licence fees and fuel sales would be investigated. Interestingly, this potential new proposed levy may not impact electric vehicles especially if it is introduced with reference to fuel sales which could further encourage the uptake of electric vehicles in South Africa,” it said.

Further carbon tax proposals

The legal firm said that manufacturers and users of petrol and diesel vehicles need to keep in mind that the taxes imposed as a result of the use of such vehicles is only likely to increase.

“This appears evident from the announcements in the recent 2022 Draft Taxation Laws Amendment Bill, which proposes, amongst other things, substantial increases in the annual carbon tax rate going forward,” it said.

“The likely effect of this is that each person in the petrol/diesel vehicle manufacturing supply chain, including the end-user, will potentially have to pay more for the vehicle and for the fuel necessary to use such a vehicle.”

Read: Big petrol price cut building in South Africa for September: economist

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