The set-top boxes that South Africans will need to keep watching television when analogue broadcast is turned off at the end of 2013 could cost consumers as much as 20% more at the till, because of a tax classification.
SA is gearing up to switch over to digital television, and every household will require either a television with a digital tuner, or a decoder to convert the signal so that it can still be viewed on older analogue televisions.
However, the vital decoders are classified as luxury items under ad valorem excise tax tariffs and attract a 7% tax, because they are classified as television “reception apparatus”. Consequently, the boxes could be as much as 20% more expensive by the time the consumer checks out at the till point, earning the taxman as much as R800 million in additional tax.
Ad valorem excise taxes are charged on locally-manufactured items that are deemed to be luxuries. The category includes televisions, fridges, cosmetics, dishwashers and cellphones.
Set-top boxes were initially expected to cost around R700, but this was based on SA migrating using the European DVB-T standard and not the upgraded version, DVB-T2. SA decided to migrate using DVB-T2 earlier this year.
Local decoder prices are not yet available, as they cannot be manufactured until several issues surrounding migration are cleared up. However, boxes retail in the UK at between £60 and £100 - or between R572 and R953.
About 10 million boxes will be needed so that South Africans can continue watching television after the analogue signal has been turned off, according to previous Department of Communications (DOC) estimates.
About half of these will be subsidised by government, says spokesman Tiyani Rikhotso. He says the DOC anticipates subsidising these boxes by about 70% out of the R2.45 billion that government has earmarked to aid the poor in continuing to receive a digital signal.
Tax on tax
Steven Ambrose, MD of WWW Strategy, points out that the luxury tax will have an impact on the cost of set-top boxes. He explains the tax is paid at the manufacturers' gate, but could spill over to be as much as 20% higher by the time set-top boxes reach the till point.
Ambrose estimates that the entire set-top box market for digital migration will be worth about R4 billion, based on government's subsidy of R2.45 billion for five million boxes, as the market is continuously growing.
As a result, Ambrose says, the luxury tax could add about R800 million to the South African Revenue Service's coffers, taking into account value-added tax added on at the point of sale. “It's not insignificant money.”
The irony, he points out, is that government is effectively taxing itself as it will rake in revenue from the subsidised boxes. “It's an unintended consequence of a convoluted and rather archaic system.”
Ambrose says the ad valorem tax is a “luxury tax on an absolutely essential product that the government is going to subsidise”. Ad valorem is “totally arbitrary” and is a hangover from an outdated tax system, and government has “missed the boat” as the luxury tax issue should have already been sorted out.
Bad luck
MultiChoice has already tried, and failed, to have a decoder reclassified under a tax heading that doesn't attract the luxury tax. The company last month lost an appeal to have the price of decoders reduced by reclassifying them.
The Supreme Court of Appeals' ruling determined that the decoder MultiChoice wanted reclassified falls under the tariff heading that attracts a 7% luxury tax. The court said this is because its primary function is to receive a television signal.
MultiChoice SA CEO Nico Meyer says although the company respects the judgment, it is unfortunate as it will add additional cost to decoders. “MultiChoice pursued this matter in an effort to reduce the overall cost of the decoder to the consumer.”
Meyer explains the ruling is applicable to decoders in general, including set-top boxes. Altech UEC MD Rodger Warren says the tariffs are handed up the value chain to its business partners.
South African Revenue Service spokesman Adrian Lackay says, while set-top boxes fall under the tariff heading that attracts the 7% tax, government and private individuals can approach the International Trade Administration Commission (ITAC) of South Africa to reduce the rate.
ITAC is responsible for reducing or increasing the rates, while SARS merely collects the taxes, explains Lackay. ITAC was established in 2003 to promote investment in SA and the common customs union area. Its core functions are to control import and export, investigate custom tariffs and find trade remedies.
Rikhotso did not respond to a question as to whether the department will lobby to have the tax removed or reduced to decrease the cost of set-top boxes.
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